In March 2004, the FASB issued an exposure draft of a standard proposing the expensing of ESOs. However, the proposal faced powerful opponents. These included large corporations such as Texas instruments, Cisco Systems Inc., Intel Corporation, and SUn Microsystems, Inc., all of which were heavy ESO users. Als, bills were introduced in the U. S. Congress to override or water down the expensing requirement. For example, one such bill would have limited ESO expensing to the firm's top five officers. These bills were of concern, since Congress has the power to override the FASB. Objections to the proposed standard were similar to those raised when the FASB attempted to implement a similar standard in 1994. These include the confusing of investors, damage to job creation and innovation, damage to the competitive position of U. S. industry, and unreliability of fair value ESO measures. The proposed standard also had powerful proponents, including some congressional leaders and then- Chairman Greenspan of the Federal Reserve. Also, despite the opposing arguments, by early 2004 almost 500 U. S. corporations had voluntarily decided to expense their ESOs. Required:
a. In theory, what are the advantages of ESOs as a compensation device?
b. In practice, during the period leading up to the 2007– 2008 market meltdowns, what were the claimed negative effects of ESOs on financial institution managers’ incentives and actions?
c. Are ESOs an expense? Explain why or why not.