Also — I don't see any problem with forcing companies to compensate employees in cash instead of employer equity. Especially for publicly traded companies, employees can go ahead, turn around and plow that cash into company stock if they want to. (RSUs are just cash in the form of stock anyway.)
The issue is that the companies that most depend on options/SARs/etc. to get off the ground do not have the cashflow. Otherwise it would not even be in their interests to grant equity.
Again, I don't see that as a problem. Instead of paying their employees in cash and dreams, they're forced to just pay in cash. If employees are less keen on the same amount of cash without the dream, too bad for companies too marginal to pay a prevailing wage.
That’s an interesting point. They are and they aren’t. Cash as in actual dolla dolla bills they are not. Cash in terms of GAAP liabilities they are. But “stock-based compensation” is generally the largest part of what public tech companies exclude when they report non-GAAP earnings. And the lion’s share of those will be RSUs.
Why do companies think this is a reasonable way to report? (Other than simply trying to look better for non-experts who don’t know how this stuff works.) The most obvious reason from my perspective is that this is a variable cost that is already baked into the model. The variable part is obvious — if I make a promise to give you 300 shares the value side is going to change over time. If our earnings are crappy and everyone sells the stock (to who?!) then the value of your compensation has just dropped. The cost side is also weird — these shares aren’t bought on the open market at time of vest, they are in employee pools that are set aside ahead of time (in fact my understanding is that the usual terms of an RSU require the stock to be set aside at time of grant). So theoretically they should cost whatever the fair market value is at the time the pool was created. Either way they aren’t cash that left the company’s bank account and went to the employee, like regular compensation.
I don't like the government literally making the choice for everyone. It's an incentive structure. It's like taxing a promise note to me that I'll be paid $x dollars in $y years. Options is an incentive which says I can't pay you as well as I'd like but instead I'll share the upside with you. Investors who put in cash are not taxed for the shares they receive. Options should be viewed similarly. It's like sweat-equity in a sense.
Options in a private company are a terrible compensation structure for employees. They're horribly complicated, and even under today's laws taxes are due before any profit is realized. If we want to keep the idea of ISOs as an alternative incentive structure, they should be taxed later rather than earlier — at the time they can be converted into some liquid asset (cash or publicly traded stock).
Practically, ISOs today are used primarily for two reasons beneficial to founders and investors: to pay employees in dreams rather than cash; and to claw back compensation from employees who leave the company (most employees who leave will never be able to exercise their options).
