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But the balance sheet should show some line for something like 'non-operating liabilities'.

Why a liability? The company will get paid if the options are exercised.

And forget about options in the market; they have no relationship to stock-based compensation.

Apparently, any company can simply cut salaries by 20% and replace them with stock options and become more profitable whenever they want.

That depends on the price of the options and the price of the stock. If the option grants are perceived as worthless because the company is doing poorly, then the management is likely to just quit.
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