Taking stock of options
EDITORIAL
The San Francisco Chronicle
Sunday, July 21, 2002
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Wanted: Silicon Valley tech workers. 80-hour week, low pay, snarled traffic, insane housing costs. Free pizza at midnight, casual Fridays, and don't forget the stock options.
This come-on built a corner of American industry and innovation. Though nearly flattened by a burst stock bubble, tech is still a cradle of enterprise, applied brainpower and leading-edge research.
But stock options, an essential part of Silicon Valley's pay package, are at the center of a political and financial tug-of-war. A nasty, morning-after, pre-election mood has overtaken Washington as it reforms the post-Enron business rules of the country.
To defenders, options are the additive that spark the gas tank of entrepreneurism. It's the enterprise's gilt-edged IOU, a promise to pay employees and management with future stock at discount prices.
But critics rightly claim the device can be misused. Poster boy for this argument is Enron Chairman Ken Lay, who exercised $180.3 million in options before his company hit the rocks.
More generally, stock options are knocked because they aren't deducted as an expense on company books. Investors are largely unaware of the huge "overhang" that options load onto a firm's financial future.
Also, with options dangled before executives, company leaders feel the pressure to generate quick, stock-boosting profits that enrich themselves. When times were good, few questioned this pattern.
Right now, Washington is gridlocked over what to do about stock options. This pause could be a useful time to avoid quick answers while searching for fuller solutions.
Sen. John McCain, R-Ariz., wants options ruled as an expense, never mind the damage to a company's financial image. He has company in plain-talking billionaire Warren Buffett, who brought Coca-Cola and the Washington Post into the fold of those who promise to account for options.
But for these and a handful of other companies that have stepped forward, options are small change. For technology industry mainstays such as Cisco, Intel, Dell and Microsoft, tallying options would mean drastic change.
One study by Merrill Lynch indicates that if stock options were expensed by the country's top 500 companies, earnings would sink by an average of 21 percent. For tech companies, the number would be 70 percent this year.
Devising an abuse-free system of stock options will be tricky. No one wants to ban options, but companies must account for their hidden size.
With the stock market tanking, companies are already finding that options no longer appeal to many workers. But if share prices rise, the problem will resurface. Companies must show restraint in doling out options. Other ideas include a longer vesting period to collect options or a ban on top executives selling huge amounts while in the job.
Congress should take care in regulating an earnings device that has shown both problems and potential. Slamming a lid on stock options could do more harm than good.
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