Accounting for executive stock options: a case study in avoiding tough decisions

Abstract

The development of accounting requirements for executive stock options (ESO) is reviewed, and it is found that the standard-setting process has been susceptible to pressure groups, including the corporate sector, politicians, and even the accounting profession itself. The failure of Australian and overseas accounting regulators to take tough decisions may have created a systematic bias toward the use of ESOs, which can result in grossly inefficient compensation structures motivated by a desire to maximize reported profits rather than to create optimal managerial incentives. Most of the arguments against recognition of stock option expense can be dismissed as blatant self-interest at worst, or remarkably muddled thinking at best.