Stock Options Redux: The Argument for Granting Them

To begin with, let it not be said that the authors don’t take their own shots at the abuse of executive stock options.  Using evidence ranging from Harvard professor John Calhoun Baker’s first exhaustive study on the subject in 1937, to USC economist Kevin J. Murphy’s 1999 review of decades of data, the writers debunk the notion that granting stock options to executives results in their creating any extra value to offset the dilution triggered by this increased compensation.  In other words, stockholders lose.    

Still, you can’t sell a book about why every employee should have stock options, and focus entirely on the bad apples.

As the authors rightly point out, the greatest successes in using stock options to increase productivity and profitability have occurred in high tech firms.  These successes, they acknowledge, were largely because of the flat organizational structure (allowing for more true employee input) and the fact that they were organizations of “knowledge-workers”; the point being that workers hired for their knowledge and thinking skills are in a better position to contribute to increased profitability in the first place.

Blasi, Kruse and Bernstein say their central argument is that most corporations in America would enjoy more motivated workers and larger profits if they embraced partnership capitalism centered around employee stock options.  What gets overlooked in this argument is that the stock options, themselves, are but one tool in an broad arsenal that must also include an overall shift in company culture if the options are to work their magic.  In the end, the authors are careful to offer a range of caveats about the pitfalls of attempting partnership capitalism outside this broader context.

Most of the data the authors use to buttress their case is presented in easy-to-read tables, sprinkled unobtrusively throughout the text.  Extensive notes also allow the reader to dig deeper at his own convenience.  In fact, even greater detail is offered on the book’s website.  Finally, a thorough bibliography demonstrates the depth of work that went into the writing.

A side note: The authors advocate that employee stock options not be reported as an expense in company financial statements.  Their argument is that options are not compensation for labor performed, but are instead “a form of capital income”, distinct from wages, salaries and benefits.  Whether you agree or disagree, In the Company of Owners makes interesting reading for its unusual take on a subject that has aroused no small amount of controversy and resentment.