The era of expense-free compensation is finally over. The Financial Accounting Standards Board's (FASB) decision to require stock option expensing ends a rather intense period of debate, accusation, and executive shirt-tearing.
I became a believer in option expensing earlier this year, although I'm not sold on the approved model. Alternate proposals, running the gamut from maintaining the status quo to marking the expenses to market each quarter, were slung against the wall. None stuck.
With support from heavyweights such as Berkshire Hathaway
Apparently, some people think it is bad. Resistance to expensing was fierce, spearheaded by such big-time executives as Intel's
These are certainly legitimate, if exaggerated, concerns. It would be easier to maintain the status quo, and there is a real possibility that option grants to non-executives will shrink. And yes, earnings will be affected across the board, sparing few companies. However, this argument assumes investors are either too ignorant or too lazy to adjust reported earnings for option compensation costs already detailed in the footnotes. Plus, when it comes to the economic condition of a company, option expensing doesn't change anything -- it's just accounting.
Yet, as the great philosopher Yogi Berra once said, "It ain't over 'til it's over." Unable to sway the accounting watchdog, industry took its fight to Congress. The House of Representatives passed a bill requiring companies to expense only options given to the top five executives, which led Warren Buffett to write a scathing rebuke of Congress. This ridiculously inconsistent proposal treats equivalent transactions in two radically different ways, violating the spirit of accounting transparency.
The Senate version of this silliness has 25 co-sponsors but looks dead in the water, thankfully. Having Congress make decisions on accounting rules not only threatens the legitimacy of an independent accounting board; it's also loaded with too much irony to be taken seriously.
Fool contributor Chris Mallon owns none of the companies mentioned in this article.