Executive stock option plans are rife with problems. But at the behest of the California State Teachers' Retirement System, or Calsters, compensation expert Graef Crystal has developed his ideal solution.

Calsters, with $90 billion under management, the nation's third-largest pension fund, is a frequent advocate of improving corporate governance and an energetic proxy voter. While Calsters says it won't necessarily make investment decisions on the basis of how a company grants options, Crystal's recommendations will provide Calsters with fodder for determining its position on future executive compensation proxy votes.

In his report for Calsters, Crysal runs off a litany of problems and potential solutions regarding options -- including repricings and the timing of options -- but the solution that will do the most good, Crystal says, is happily the one that will be implemented the soonest: requiring that corporations expense their stock option grants. "That will go a long way towards fixing all the other issues," says Crystal, who also writes a column for Bloomberg. "It will cut the mega-grants and force companies to realize that options have a cost."

Crystal points to Apple ( AAPL) CEO Steve Jobs and his 20-million-share options grant in 2000. "Would Apple's board have made that grant had it been required to charge Apple's pretax earnings by $471 million?" Crystal asks. "I strongly doubt it."

And now that the biggest opponents to expensing stock options -- technology companies -- have effectively been silenced by the brutality of the markets, Crystal says it's likely that accounting standards will change by the end of this year. "Silicon Valley is toothless now," he says. "They fought the good fight in the 1990s when they saw robust stock price growth, but lost traction and have no moral ground on which to make their point."

Indeed, the Financial Accounting Standards Board, or FASB, has said it will revisit the issue of requiring companies to expense their options. The board has made several attempts to do so in the past, but intense pressure from the corporate community prevented such measures from going forward. But now, Crystal says, "It's a slam dunk."

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