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.
Barack Obama: “That’s rich!”