Exorcising stock options - why reform is good news for you

Amazon.com's decision to satisfy stock option reformers in its latest financial results (http://www.silicon.com/a54767) will barely raise a shrug among stakeholders in dot-com-land. Sure, three years ago when the bubble meant options were worth exercising this might have been interesting news. But now, who cares?

The answer? Everyone should care.

That Amazon has started treating stock options as an expense to be set against profits is not just an example of good accounting practise - something in short supply right now - it could also mean, indirectly, that hard working staff get a real stake in the businesses they work so hard to create.

Let's start with the sound accounting argument. The process of offering stock options starts with a company borrowing money to buy back shares. These shares are then available to selected members of staff to buy, ideally at preferential rates. That's the incentive, although what the incentive is when the market is on its knees is not entirely clear.

Nothing wrong so far but what upsets reformers is the refusal by most firms to recognise the cost involved in this process. A company has borrowed money, existing shareholders have seen their equity diluted but apparently no one is taking a hit.

It's a 'win-win' that's just too good to be true, says Warren Buffet, one of the world's foremost investors. Buffet was quoted recently posing the following rhetorical questions: "If stock options aren't a form of compensation, what are they? If compensation isn't an expense, what is it?"

Where Amazon has led the rest of the US should follow in a couple of years. Europe, too, should commit to this reform well before the end of the decade.

So far so good. But what's in it for you and me?

Until now stock options have been attractive to employers precisely because they don't have to reconcile them on their books. Faced with the prospects of treating options as an expense firms ought to be more inclined to consider real incentives for key employees - namely, equity in the company.

Share prices may be hitting the floor right now but owning a chunk of stock remains more inviting (and offers a greater incentive to help lift your business out of its market-induced trough) than the option to buy at above market rate.

Once options are set against profits your employer will no longer have an excuse not to consider the alternatives. And if you're a manager, you'll finally get a proper hand to play when it comes to motivating your staff.