The accounting first. As things stand now, options are a free lunch for companies–employees place a high value on them, but companies can issue as many as they want without hurting corporate profits. That’s because companies don’t have to count options’ value as an expense. With reform in the air because of Enron, old-math types like Warren Buffett and Alan Greenspan are pushing to change accounting rules to force companies to count the value of stock options as an expense in their profit-and-loss statements. Accounting rule makers proposed this a decade ago, but backed down under political pressure generated by corporations, especially in options-happy Silicon Valley.

Then there’s a second, little-known aspect of the options-accounting debate. If companies have to count the value of options as an expense, they would come under huge pressure to report their value as compensation to the CEO, and to members of the board. Under current rules, a company has to show shareholders a table that includes how much it gave the CEO in salary, bonus, long-term compensation and other benefits. But the table has to show only the number of options granted to the CEO, not their economic value. To find that, you have to hunt on other pages–and you may not find it at all if the company opts to report a different way. “The original idea was to have the value of options in the table, not the number of options,’’ says Graef Crystal, a compensation expert who worked on the disclosure rules. But, he says, the SEC backed down after companies objected.

It’s easy to see why companies would have been upset at having to count options as compensation. In most pay filings I see these days, the economic value of CEO and directors’ options exceeds their cash payments. So counting options would more than double the typical package.

To see how this works, let’s look at Dell Computer and Knight Ridder, two companies I just happen to have looked at recently. Dell’s most recent statement shows that Michael Dell, its billionaire owner and founder, earned $2.6 million in salary and bonus. Not starvation wages, but not much for a big-time CEO. On a different page, you see that he got options the company valued at $26 million. That’s major moolah. Dell directors were paid a $40,000 annual retainer fee, but also got options on $850,000 worth of stock. The options’ economic value: around $300,000. Note that I’m not accusing Dell of hiding anything–it’s following the rules.

Dell shows why options have economic value when they’re granted, even if the stock subsequently falls. The directors got their options when Dell stock was about $52, double today’s price. By getting options on $850,000 of stock rather than buying 16,298 shares, directors avoided losing money–and didn’t have to tie up $850,000. Meanwhile, they had the same upside as regular investors who risked $850,000. The company says its compensation packages are skewed toward options, so that employees and directors don’t make out unless regular stockholders do.

Now to Knight Ridder, which has been on a cost-cutting kick for years. Last year chairman Tony Ridder got $935,720 in salary and no bonus. He also got options on 150,000 shares. Knight Ridder values the options at about $1.6 million, but by most rules of thumb, they were worth twice that much. Knight Ridder directors got a $40,000 annual fee–and 4,000 options. The options were worth about $42,500 by Knight Ridder’s math, about $85,000 by conventional math. Knight Ridder says its figures are lower because it assumes its options are exercised much quicker than other analysts assume.

I’m all in favor of employees becoming millionaires via options–I’m an employee, after all–but I’m also in favor of companies providing profit-and-loss statements that show the real profit and loss. Ignoring options’ costs and low-balling CEO pay packages are simply outrageous. When companies start expensing options and disclosing true CEO and director compensation numbers, I’ll believe they’ve seen the light. Until then, I’ll assume that they’re still on the bottle.