How the Government Data, not Stock Options, Muddles the Relationship Among Wages, Corporate Profits, and Inflation

Fred Whittlesey
Compensation Venture Group, Inc.

Here we go, now stock options did something wrong again.

Have I not been saying for many years that the US Government data, coming from the Bureau of Labor Statistics, Bureau of Economic Analysis, and other agencies are just plain wrong? Most recently I pointed this out in The Myth of the Average Worker Pay Ratio. Today in the Wall Street Journal’s Outlook column we see a succinct explanation of some key methodological issues. This is a valid point confirmed by a today story in “How Stock Options Muddle The Relationship Among Wages, Corporate Profits, and Inflation." Those pesky stock options, they're at it again.

The basic story: American workers earn more pay than the government thought; the Commerce Department's Bureau of Economic Analysis has been understating employee income (no doubt fueling dissatisfaction among US workers when they see a continual stream of news saying it is so), and overstating corporate profits thus in turn overstating Gross Domestic Income (GDI). How interesting that this line of misinformation directly supports the left-wing contention that those greedy corporations are making more money but the poor rank-and-file workers are not. Erase, erase. (I would have thought that a Republican administration would have been on top of this and ensure that the story was fixed, to their advantage.) Further, this increase in “wages” is not inflationary because “corporations don’t think of stock option expenses ordinary labor compensation” says one tax and accounting expert. I guess that expert missed the 22-year debate over stock option expensing culminating in FAS123R.

But now just as the light bulb appears to have come on regarding stock options, the BEA needs to continue their education in compensation and understand that a because some firms are using restricted stock or restricted stock units (RSUs) the tracking of option gains may miss that too. They also are probably missing income and gains from employee stock purchase plans (ESPPs) and some of that is capital gain, not ordinary income. Of course, if they’re not including the Alternative Minimum Tax items and capital gains from Incentive Stock Options (ISOs) they are missing still more pay. Did they really forget to count that $289 million Omid Kordestani from Google earned last year?

I teach courses in Accounting and Finance, Executive Compensation, and Advanced Executive Compensation for WorldatWork, the association for compensation professionals. I invite the Commerce Department and Department of Labor to send their statisticians and analysts to my course – we even offer a webcast version so they don’t have to leave Washington DC – and I’ll help them understand all of the ways employees are paid in America as well as helping them understand the difference between GAAP accounting and tax accounting. (For example, the tax deductible "expense" resulting from an option exercise may reduce profit by IRS rules but is a cashflow windfall for the company.)

That can be my public service for the year and then I can return to helping companies in the private sector figure out how to pay their employees effectively, whether the US Government defines it as “pay” or not.