Executives can no longer think of stock options as a free ride. The exodus of investors from equity markets and the accounting scandals that toppled Enron and WorldCom have made scores of blue-chip companies—Coca-Cola, General Electric, and Procter & Gamble among them—announce plans to account explicitly for the cost of the options they use to compensate executives and other employees. In November of 2002, the International Accounting Standards Board published a proposal to require all companies to do the same. In any case, rather than burying options as a footnote in financial reports, more and more companies will now report these payouts in the same way they do office rents, salaries, and other business expenses. Such accounting changes are unlikely to harm stock prices, and over time this healthy standard of disclosure should spread throughout the economy, thereby providing investors with clearer and more complete information.

The change, by itself, won’t make it easier for executives and boards to manage compensation. For a start, treating options as expenses opens up another arcane accounting debate: how to calculate their real cost. Moreover, managers must continue to evaluate the desired mix of cash, restricted stock, shadow stock, options, and other such...