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That presumes Cisco would, if not giving me options, sell them on the open market. Do you think they would do that? I don't know.

You could also assume that in the absence of stock option grants, Cisco would have to pay you a higher salary. That's the point - you want the income statement to recognize the cost of employing people. Regardless of whether those people are compensated in dollars or stock options or paper clips. The fact that stock options have an uncertain terminal value makes it more difficult to calculate the option value, but not impossible.

If Cisco, instead, bought lottery tickets and distributed these "instruments with uncertain payoffs" to its employees, would there be an expense? What if they were all losers (expired underwater)? Would they retroactively change the expense after the lottery drawing to $0? How about if one of the tickets turned out to win the mega-prize?

Options should be valued on the date they are granted and expensed when earned by the employee (i.e., over the vesting period), just like every other form of compensation.
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