For decades companies have been granting stock options to executives and other employees as a method of compensation.  Companies claim that these options are necessary to attract and keep key employees.  Even if this is true, the cost of these options are very destructive to the companies and to shareholders.  Employees should only be compensated from company profits and not from the granting of stock options.

For example, when companies award stock options to their employees a strike price is set that controls the minimum price the stock need to be at for a profitable execution.  Frequently, options are awarded with strike prices below the current stock price and sometimes slightly higher.  If the stock moves up through the strike price there it is a no risk trade for employees to exercise their stock options and immediately sell their newly acquired stock for a profit.  The exercise results in new stock being issued, thereby diluting all existing shares of the companies.  In effect, all shareholders are penalized when an employee exercises the stock option.

There is also a freaky little accounting rule that let company use the price of the stock option (up to the strike price) and claim this as earnings.  Thus, the more stock options that are exercised, the move earnings that company has.  These are false earnings but still are reported like all other earnings when the company report.

Also, since compensation is tied to the stock price then executives will go to great length to raise the price of the stock even at the expense of the overall company.  This results in very short term decisions and a conscious sacrifice of the long term.  If the stock drops in price then new stock options are awarded at the new lower prices.  Thus, it makes no difference to an executive if a stock falls dramatically — they may even want such an event to occur if they are expecting a new option grant.  Yet, with each exercise more stock is issued and the outstanding shares are increased.

This is a terrible way to compensate executives or employees.  In effect, they are using the company as their person piggy banks.  As more and more stock is issued the price of the stock will decline and eventually the company will cease to exist because the number of shares become so large that the earnings of the company cannot keep up with the number of shares issued.

Recently, company executives are announcing that their CEO will work for $1 per year.  This is no sacrifice because with stock option grants they will make far more money than any salary they will be paid.  This is simply a sham to suggest they will be making no salary.

Such a system is destructive for companies and for the shareholders who invest in these companies.  It should be illegal to grant stock options for compensation.  However, it will likely not be illegal because America executives are corrupt and greedy.

America is doomed.