Hi Don Lloyd; Re: "Austrian Economics comes into the picture because of the argument that because options can produce a large reward to the employee, there must be a large cost somewhere to offset it."
I agree with you here, but I have not made that argument. Just because something is valuable is no reason to list it as a high expense to the person giving it up. (Think virginity. Women have been known to give that up many times in succession.) But that is not part of the reason for classifying stock options as expenses to the company. Accounting has nothing to do with who got rich or what have you, it has everything to do with allowing humans to easily gauge the worth of shares in a company, or the company as a whole. In order to fill that purpose, employee expenses must be carried as expenses, not ignored.
Suppose a company was formed who's only reason for existence was to sell a large pile of diamonds. They could pay their employees with diamonds, if they wished, or cash instead. I know this has nothing to do with motivating employees to work harder and all that, but motivation has nothing to do with accounting. Accounting is purely a technique for looking into the past and trying to assess whether a business was profitable, and by how much, and trying to assess what the business is worth. It has nothing to do with who got rich and who got motivated or by how much.
Now what is the purpose of profit and loss statements? Are they to help determine the financial health of a company, or are they to assist potential shareholders in analyzing the value of their stock? I say the latter. I also say that the SEC exists to protect the interests of the investors, not of the companies (which are fictitious entities, can't vote and are not even people anyway).
So which is a more accurate assessment of the Diamond selling company? The one where the employees are paid in cash, or the one where the employees are paid in diamonds? I say it is clear to us both that the worth of the diamond selling company has to be taken as the value of the diamonds owned, minus the costs of selling them, with something thrown in for risk and time value of money. If the payroll is paid in terms of cash, we are in agreement. If the employees are paid in diamonds, then we are probably also in agreement, because you will note that the diamonds are limited, have a definite value, and the company cannot manufacture an infinite amount of them out of thin air. But with stocks, we are in disagreement, because the company can manufacture an infinite amount of it.
Did I get the gist of our differences here stated succinctly? Namely that you feel that a company cannot carry as an expense something that it can manufacture infinite amounts of without cost?
-- Carl |
