-------- Original Message -------- Subject: Re: Jim Delong's dissenting view on stock options expensing Date: Thu, 8 Apr 2004 08:02:18 -0500 (CDT) From: odlyzko@private (Andrew Odlyzko) To: declan@private Declan, Here is a comment on the recent exchange. Please send it on to the politech list, if you think it is appropriate. Andrew Jim DeLong and Martin Hutchinson take contrasting positions that are both questionable. Stock options are neither embezzlement nor a triumph of "the creative class." They can be very valuable compensation instruments. However, their current accounting treatment (which basically ignores them) presents a distorted view of an enterprise's financials. Unfortunately, expensing options will also lead to a distorted view. The basic problem is that options are rather complicated derivatives, and the standard accounting measures are often inadequate in dealing with them. There is no simple way to see this, and one has to go through some detailed examples that show what the effect of options is. I did that once, using an extremely simplified model of a high-tech startup that relies almost exclusively on options to compensate employees, and a similar one that only pays wages. This example is presented in a letter to Barron's on this subject that I sent them in 2002, and is available at http://www.dtc.umn.edu/~odlyzko/misc/barrons-options-letter-full A very brief version of it was published in the August 5, 2002 issue of Barron's, and is available at http://www.dtc.umn.edu/~odlyzko/misc/barrons-options-letter-edited Andrew Odlyzko _______________________________________________ Politech mailing list Archived at http://www.politechbot.com/ Moderated by Declan McCullagh (http://www.mccullagh.org/)
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