In today's news...
CEO Option Grants Considered Harmful
It didn't really become clear to me how this would be true until reading Buffett's Letters to Shareholders, but he makes the case very clearly, though he doesn't actually emphasize the gambling aspect.
Stock options themselves are fine vehiclesfor getting an investment in a company, and I personally will probably never directly short shares when put options are available. (That said, my strategy is almost completely on the long side--the short side is too unpredictable to time properly.) However, there are two problems.
We have, thankfully, corrected the accounting problems in terms of stock option grants, so that's a step in the right direction. But when you give out options, it only makes sense to give them to people who can make a difference, not in return for goals which have a negligable impact on the bottom line. This means that in startups there can be some good use of stock options because things are so small that everyone has a signficant impact on company performance, and it will frequently be *less* dilutive to investors than trying to get another round of funding.
In large companies, however, options tend to be given out to people who don't have such a significant aspect. And, if they're actually destructive when given to CEOs, not just a shower of money, it's hard to see why you'd use them as incentive compensation at all. A restricted stock grant as opposed to an option for a CEO makes a lot more sense. The bottom line is, you want the people running to business to think and act like the own it, not that they're playing with someone else's toy.
It didn't really become clear to me how this would be true until reading Buffett's Letters to Shareholders, but he makes the case very clearly, though he doesn't actually emphasize the gambling aspect.
Stock options themselves are fine vehiclesfor getting an investment in a company, and I personally will probably never directly short shares when put options are available. (That said, my strategy is almost completely on the long side--the short side is too unpredictable to time properly.) However, there are two problems.
We have, thankfully, corrected the accounting problems in terms of stock option grants, so that's a step in the right direction. But when you give out options, it only makes sense to give them to people who can make a difference, not in return for goals which have a negligable impact on the bottom line. This means that in startups there can be some good use of stock options because things are so small that everyone has a signficant impact on company performance, and it will frequently be *less* dilutive to investors than trying to get another round of funding.
In large companies, however, options tend to be given out to people who don't have such a significant aspect. And, if they're actually destructive when given to CEOs, not just a shower of money, it's hard to see why you'd use them as incentive compensation at all. A restricted stock grant as opposed to an option for a CEO makes a lot more sense. The bottom line is, you want the people running to business to think and act like the own it, not that they're playing with someone else's toy.