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To: SI Dave who wrote (160020)	3/31/2004 7:06:18 PM
From: Oeconomicus	Read Replies (1) \| Respond to of 164684

Dave, I agree with your views on both option expensing and grants vs. options, having made the same arguments here at least a year ago. To answer GST's question about incentives, grants provide a better match of management and shareholder interests than do options - by far. With options, managers have a very strong "bet the ranch" incentive and no incentive to consider risk and preserve shareholder value. They make money (hugely) if their bets pay off for regular shareholders (an infinite return to the optionee, really, as they have no value at risk), but they have nothing to lose (except, perhaps, use of that corporate jet) if their bets ruin the company and wipe out shareholder wealth. It is completely rational for them to make big, risky bets on the future of the company - everything to gain and nothing to lose. With grants, OTOH, they do have something to lose - the value of the shares at grant or vesting (a value they have paid taxes on, too, as it is taxable income as soon as they are entitled to turn it into cash). They are then in the exact same position as the average shareholder - weighing risky opportunities against the value in hand and judging whether it is prudent to risk that value for the potential returns. Options blind them to the risk - they see only the potential returns (magnified by the leverage of options). That said, I think options are OK for rank and file employees as they can't generally "bet the ranch" and options do have tax advantages over grants. But for execs? Ban 'em!