Stock Options

Fortune has a silly article on options, arguing that they should go to more rank and file employees because "ownership creates a sense of belonging, an egalitarian meritocracy that makes a difference every day on the job." This is even more asanine than it looks on its face -- earlier the article argues (sensibly) that options should be expensed and benchmarked against broader indices.

Options should be expensed because they're expenses--they dilute ownership and thus reduce earnings per share, which is what expenses do (curse them!) They should also be tied to indices because you want to reward relative, not absolute, performance. Rewarding a lucky dud in a boom is as bad as punishing an unlucky star in a bust. But at this stage, what with all the expensing and indexing, you might as well hand out equity, because options are behaving in almost the same way (and equity has the added benefit of not making volatility more valuable).

So why shouldn't options be given to the rank and file? Firstly, these new expensed options are going to replace some salary, and many rank and file employees may prefer cash now instead of (dubious) options in the future. Most importantly, if CEOs are largely at market's mercy with respect to how their company performs, regular employees are even more so. The average baggage handler at Southwest knows that his performance on the job has no bearing on the company's stock price, and therefore the value of his options. The motivating effect option based compensation has on his is zero, in that it utterly fails to tie his actions to his rewards. As soon as United's employee/owners finish striking, it'd be nice to ask them about their sense of corporate solidarity.