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"If Cisco, instead, bought lottery tickets and distributed these 'instruments with uncertain payoffs' to its employees, would there be an expense?"

Nonsense, Cisco doesn't have to actually pay for the lottery tickets. They print the tickets up themselves. And they extract the payout from the owners, taking a little bit from each one and cleverly hiding the expense.

Getting back to the original poster, to apply some of Buffett's arguments, if the Cisco stock options don't have real, tangible value, then you'd have no problem giving them away to someone else such as myself. If they aren't worth much, then perhaps you would be willing to issue your own options to other employees (i.e. pay out the difference between the current stock price and the stock price at any time within the next 10 years, allowing the purchaser to pick the time to exercise). "Why not?", I ask, since you can't really determine how much they're worth. We'll even let the company pay you the strike price up front! What could possibly go wrong?

I, too, am a long time recipient of employee stock options. I've received options both as an employee in a startup company and as an employee in a large company. I also trade options on the open market in order to make money, scouring options prices in hundreds of companies trying to look for cases where they are clearly mispriced. One interesting thing I've noticed is that most market prices for options land well inside my own range of the fair value of those options. Something tells me those CEOs and CFOs could figure out what those options are worth if it was in their own best interests to do so.

In my opinion, there are two types of situations where employees receive large amounts of stock options. The first is in startup companies where they are asked (and expected!) by the owners of the business to make huge personal sacrifices to make the company successful. Yet even in those cases, the employees usually gain very valuable experience which will likely benefit them later on. But the venture capitalists and other private financiers know how much of the company is being handed over to the employees and they understand the costs. The second situation is in your typical large company where most employees have zero impact on the stock price. They are rarely expected to make anywhere near the same level of sacrifices, either. So in effect, they're receiving lottery tickets with extremely good odds, high payouts, and the cost is carefully hidden.

We're living in an age when people have forgotten the cost of establishing a business and they've forgotten who owns the business.

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