Posted on Fri, Dec. 17, 2004
Stock options rules issued
FINAL GUIDELINES FROM FASB TAKE EFFECT IN MID-'05
By Mark Schwanhausser, Mercury News
siliconvalley.com
Accounting rule makers handed down long-awaited final guidelines Thursday that will force companies to deduct the value of billions of dollars of employee stock options from reported profits starting in mid-2005.
The change, which is intended to give investors a more accurate picture of companies' compensation costs, is expected to reshape how workers are paid in Silicon Valley and the technology industry.
Although options will remain a prominent part of pay packages here, especially for start-ups, fewer workers overall are likely to get them. And those who do will receive smaller grants and get them less frequently.
In fact, in anticipation of the new rules, some tech companies have already begun using other forms of compensation, from stock grants to plain old cash.
The Financial Accounting Standards Board's rules are just the latest pressure on companies to reduce option grants. Since the tech bubble burst, investors have been leaning hard on Silicon Valley companies to slow the flow of options, which dilute the ownership stake of other shareholders. Round after round of layoffs and stagnant or falling stock prices also have relieved workers' demands for more options.
``This is just the impetus for more change,'' said Jim V. Hughes, a managing director for Pearl Meyer & Partners, a compensation consulting firm. ``All the people who held out can't hold out any longer unless Congress does something. And I don't think they will.''
The new rules will take effect June 15 for public companies, with companies accounting for options in the third quarter if they report on a calendar year. The new rules are delayed until Dec. 15 for start-ups and private companies.
Using a variety of formulas, companies will have to calculate the value of their options and deduct them from their net income. The impact can be significant. For instance, more than $3 billion in combined profits would have vanished at Cisco Systems, Intel and Sun Microsystems if the new rules had applied in their most recent fiscal years.
About 750 public companies already have thrown in the towel and agreed to voluntarily expense options, according to brokerage firm Bear, Stearns.
So far, Silicon Valley companies have formed a united public front to fight the rules in Washington. The tech lobby vows to continue pressing Congress and the Securities and Exchange Commission to block the rules.
Behind the scenes, however, companies are at various stages of figuring out what to do if expensing is forced upon them. One expert likens tech companies to a patient diagnosed with a terminal disease, experiencing the stages of denial, anger, bargaining, depression and acceptance.
``A lot of companies are moving beyond depression to acceptance,'' said Ted Buyniski, a principal with Mellon's Human Resources & Investor Solutions. ``What they are doing now is saying, `OK, expensing is coming. What do I do about it?' ''
The answer so far, based on compensation trends nationwide, is they're trying a little of everything:
• Companies are doling out fewer options. Nearly two out of three of Silicon Valley's largest companies slowed the flow of options from 2001 to 2003, according to Equilar, an independent provider of information on executive compensation. The typical company slowed the ``burn rate'' -- which measures how much equity companies give to employees annually -- from 5.2 percent in 2001 to 4.0 percent in 2003.
• Fewer workers are getting options. The number of workers eligible for options plunged 40 percent at large and mid-size tech companies that voluntarily opted to ``expense'' options in 2004, according to a Pearl Meyer survey.
• The value of option grants is shrinking. From the chief executive officer to rank-and-file workers, the average price tag for awards at the nation's 1,000 biggest companies fell 40 percent from 2001 to 2003, according to Watson Wyatt Worldwide, a human resources consulting firm.
The average value of grants to non-executives dropped more than half to $2,037 -- down from $4,196 two years earlier. Likewise, the number of shares doled out dropped by a third, from 313 shares to 219 shares.
• The number of broad-based plans has dwindled. During the boom, even non-tech companies like Bank of America, Anheuser-Busch and Knight Ridder, which owns the Mercury News, got into the game by passing out small grants throughout the company. Many have since dropped out.
In 2001, 28 percent of companies handed out options throughout the company, according to a survey of 996 companies by WorldatWork. This year, only 13 percent do so.
• Companies are experimenting with other forms of pay. Microsoft rocked the tech industry last year by scrapping stock options in favor of a form of restricted stock. Other companies are mixing in other forms of stock-based compensation. Some are trying out premium stock options, which pay off only after the stock hits a predetermined threshold.
All these changes are coming at a time when job hunters aren't in the driver's seat.
When the economy and hiring rebound, workers are likely to demand more options -- and could get them, said Corey Rosen, executive director of the National Center for Employee Ownership. ``You could see happy days again if there's a job boom.''
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