Options as the Immaculate Compensation

Expensing stock options remains bafflingly controversial, so it was a pleasure to read an entertainingly direct OpEd on the subject in today’s Wall Street Journal. Reed Hastings is CEO of Netflix, and he disagrees with the Silicon Valley tribe-think that says expensing options is bad.

Hastings starts off by pointing out something that too few people realize:

“…today all companies expense employee stock options, but only for IRS purposes. The cycle works like this: We companies pay our employees somewhat in stock options, avoid it as an expense on our public SEC filings, and then claim it as expense on our IRS tax return so we pay less income tax.”

But companies get to have their options and eat them too:

“Instead of allowing much dilution from the options, we companies do a stock buyback to avoid dilution. Stock buybacks don’t show up as a reduction in free cash flow. So we look strong from a free cash flow point of view; there is little or no dilution, high public profits, and low taxable profits. Employee stock options are truly the immaculate compensation.”

But, as Hastings writes, most tech CEOs are decent sorts, so can this really be just about accounting games? No, he argues (correctly, I think) that said CEOs see this mostly as an intrusion on their tribal turf. Options have come to represent the egalitarian, wealth-generating culture of technology companies, and attempts to change that — however correct — are met with camel-style spitting.