On my other blog, I explained why I believe that employee stock options should be expensed. I got a lot of pushback. Most of it said that issuing new stock only costs the shareholders, not the "company." I have some problems with that distinction, actually. But let's let it go.
Suppose that a grocer decided to pay its food suppliers by issuing new stock instead of paying them in cash. In that case, if new stock does not count as an expense, then the grocery's "cost of goods sold" would be zero. Yet, as an ongoing business, that grocery is no better than an equivalent grocery that pays for cash and records a "cost of goods sold" on its income statement.
I think that if you are going to evaluate a company's earnings prospects, then you have to know its true cost of labor, just as you have to know its true cost of goods sold. If I want to compare two companies, one of which grants much more generous stock options than the other, then I want to see the stock options counted as an expense.
