The Stock Option - Pittsburg Morning Sun, 30-Jul 2013

Barack Obama never worked in industry. Most of his advisors never did, either. So they aren’t familiar with stock options.

When Bill Clinton was president everybody who worked for a public
company earned stock options. There are two versions allowed by law.
The most common are “qualified plans.” Employees are granted options
periodically, giving them the right to buy the company’s stock at a
fixed price over a period of time, usually five years. The allotment
usually “vests” at a rate of 20% a year, meaning each year the employee
earns the right to cash in 20% of the options granted. If the stock
goes up, they earn the difference between the new market price and the
original grant price (“strike price”). The company gets a tax deduction
for the same amount.

It was a great system.

Employees remained at successful companies so they could get more
options to vest. And the price would go up. The companies kept their
workers and got a tax deduction.

Then Arthur Levitt came along. He was the SEC Chairman when the Dot
Com Crash occurred. He concluded that the managers – who sometimes were
given huge amounts of options – manipulated their reported financial
results to artificially drive up their stock prices.

That was nonsense. There was Enron and a handful of others. But
generally the auditors kept the truth intact. And Wall Street
understood exactly what was what.

But they need a scapegoat. So Arthur Levitt pushed an accounting
rule through the SEC that made stock options an expense. And most
corporations got rid of options, except for their top managers –
everybody got screwed except for the guys Arthur Levitt was targeting.

A program to restore stock options for the middle class could boost
income significantly. It also could be structured to reduce income
inequality. All it would have to do is piggyback on the insurance and
retirement rules. Those normally prevent the top dogs from creating
plans that benefit them more than the rest of the employees. If you
establish a defined benefit plan, it can’t be just for the high income
guys. Everyone who wants to participate has to be allowed in.

The same set up is possible with options. The managers can still get
their options. But the number would be mathematically constrained by
the number of options given to the troops. Returning options to the
equation not only would re-align everyone’s economic interest. It would
give the average worker a chance to catch a windfall now and then.

The market has been going up. A mid-level worker at IBM, let’s say,
if she’d been given 1,000 options a year, she’d be up $100 a share since
2009. That’s $400,000.