NEW YORK (CNN/Money) - When it comes to the bickering over how to account for employee stock options, no company has its hackles up quite like Intel. Its chairman, Andy Grove, has repeatedly said that options should not detract from earnings like other forms of employee compensation.

Grove has good reason for his posture: Start thinking of options as an expense and it starts to look like Intel hasn't earned nearly as much money over the past several years as investors think. And by some lights, it hasn't made any money at all.

What a company earns is its revenue minus its expenses. In Intel's case, it generates revenue from selling semiconductors and then subtracts the costs for making those chips -- silicon, power to keep "clean" rooms running and, of course, wages to pay everyone from engineers to secretaries. Under accounting rules, stock options don't count as an expense since they don't "cost" anything.

But in the case of Intel, thinks Julius Baer Investment Management head of U.S. equities Brett Gallagher, employee options have cost plenty.

The whole reason for owning stock is to get a stake in the company's earnings. And options "dilute" earnings: If there are 100 shares outstanding and a company gives out another 10 to employees, the investors who own the original 100 shares get less of the earnings pie.

Intel's business generates a lot of cash. But to compensate for the options it doled out, Intel has bought back scads of stock on the open market -- $22.4 billion-worth -- since the start of 1998. The buybacks, which have kept the total shares outstanding stable, didn't cut into Intel's income.

Effectively, says Gallagher, the company was buying back shares and then handing them out to employees. "As an investor just looking at the income statement," says Gallagher, "you're missing this huge event that's taken place. Intel essentially used every penny it generated to pay employees -- every dollar it earned has disappeared." (Gallagher has no position in Intel and his firm doesn't short any stocks.)

If the company had to pay wages instead, reported earnings would have been affected. Take away the cash spent on buybacks and Intel made a whole lot less money over the past 4 1/2 years -- just $4.2 billion instead of the $26.6 billion that shows up on its income statement.

It's even worse, according to Gallagher, if you look at hard at cash flow and kick out the stuff that doesn't come from normal operations (things like selling a fabrication plant). Do that and, by his reckoning, it looks like Intel's operating cash flow since the beginning of 1998 was $21.2 billion. Take away the money spent on buybacks and you get a negative $1.2 billion. Suddenly the chipmaking king doesn't seem so profitable.

Intel's argument against expensing options centers on their natural dilutive effect. "All the options that are granted to employees are accounted for in the shares outstanding," said Intel spokesman Chuck Mulloy. Expense them and Intel's earnings (and presumably the earnings of plenty of other tech outfits) would get hit twice.

Harvard Business School professor David Hawkins doesn't agree. "Expensing options isn't double counting," he said. "If I issue shares, get cash, and pay that cash to employees, that's an expense." In other words, companies issue new shares all the time to raise cash to fund ongoing operations. Giving employees stock options is essentially the same transaction.

Without options, Intel's earnings look swell. According to a study put together by Merrill Lynch and Hawkins, the chipmaker's earnings quality -- based on criteria like return on capital and cash generation -- ranks tenth among the five hundred companies in the S&P.

But, Hawkins explains, because data weren't readily available, and because companies aren't required to expense options (as Hawkins thinks they should be), options weren't accounted for in the study.