Heinz:
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The nitty gritty on stocks options.
Workers May Suffer as Granting of Options
Grows
By Michael Brick
TheStreet.com/NYTimes.com Staff Reporter
4/6/00 2:12 PM ET
By now, Abigail Rosa's story is the stuff of modern water cooler
legend. An administrative assistant and paralegal, she worked in
law firms for 26 years before jumping to Xilinx (XLNX:Nasdaq -
news - boards) in search of stock market riches. In the three years
since Rosa signed on, the San Jose, Calif.-based circuit maker's
stock has gained 700%.
But the opportunity that created her uncommonly good fortune
may come at a steep price to employees like Rosa. As big
corporations expand their stock option plans to include
non-salaried wage earners, they are lobbying aggressively to take
away more dependable forms of compensation that labor unions
worked for years to win.
Current law does not specifically
address stock options, but the
Department of Labor has written
that the value of a stock option plan
should be included in the
calculation of workers' legally
mandated time-and-a-half overtime
pay. Companies complain that this
policy would require them to pore over years of records to
calculate the value of the options and award overtime pay. Some
critics say the companies' gripes are unfounded and part of a
larger effort to dole out risky options instead of wages and to
avoid paying overtime.
"As long as stock options are just going to executives and
managers, the issue is moot," said Dean Baker, an economist at
the Center for Economic and Policy Research. "As this moves
down the pay spectrum, this is a real issue. If they already have
the incentive to pay in options because they can hide it on the
books, and now they have the added incentive of not having to
count it on overtime, you'll be pushing firms to pay more and more
in options to the point where it doesn't make sense."
The issue germinated in February 1999 when the Department of
Labor wrote a letter to a Boston lawyer who had asked whether a
stock option program would violate the Fair Labor Standards Act,
which was designed to prevent employers from cheating workers
out of overtime pay by devising alternative payment methods.
The law, instituted in 1938, has never addressed stock options,
though the number of workers paid with options has grown from 1
million in the early 1990s to at least 8 million now, according to
statistics compiled by the National Center for Employee
Ownership.
To what degree the practice has begun to include those wage
earners is unclear. A study by economists Kevin J. Murphy and
Brian Hall found that 10% of publicly traded companies offer
options to hourly employees, and a Federal Reserve study of
415 large companies found that 7% offer options to
non-managerial and non-professional employees. The Bureau of
Labor Statistics is currently surveying around 2,000 companies
for a report it plans to publish this summer.
The Fair Labor Standards Act already includes some exemptions,
including profit-sharing programs and outright gifts. Stock option
programs carry varying rules, but they usually grant employees the
right to buy shares of the company's stock at a later date,
presumably after the stock's price has risen above the purchase
price. The program described by the Boston lawyer was typical,
and Labor wrote that it did not qualify as an exemption. For
instance, since the program required employees to stay with the
company, the option grants could not be described as a gift.
The issue lay dormant for almost a year before the letter drew the
attention of business lobby groups. In January, Republican
members of the House Committee on Education and the
Workforce told Labor Secretary Alexis M. Herman their concerns
in a letter.
"An employer would have to undertake a burdensome and
complicated process of going back, over what could be a
significant amount of time, and recalculating an hourly-paid
employee's overtime pay based on the profits earned under stock
options," wrote committee chairman Bill Goodling, R-Pa.
But Baker, the Center for Economic and Policy Research
economist, said "it doesn't strike me as that hard, given
computers, to figure out the value of the options."
In fact, GTE was able to provide precise figures for the value of
options it had granted.
J. Randall MacDonald, executive vice president for human
resources at GTE (GTE:NYSE - news - boards) and spokesman
for the employers' group LPA, told the committee that his
company would stop offering options to 50,000 hourly employees
if the law does not exempt options from overtime. In 1996, the
company granted 2.7 million options to 53,000 employees,
resulting in a total gain to the employees of $58 million, or $1,000
apiece on average. The next year, it granted 5.8 million options to
57,500 employees, resulting in gains of $100 million, or $1,800
apiece.
"The Department of Labor's interpretation, if allowed to stand, will
have the effect of denying wealth to rank-and-file employees
rather than bolstering it, regardless of how many hours they work,"
MacDonald said.
But it is the companies themselves, not the Labor Department,
that seem responsible for that denial of wealth, some critics say.
Companies "are looking for any way they can to erode the Fair
Labor Standards Act," said Jared Bernstein, a labor economist at
the Economic Policy Institute. For wage earners who take a
lower salary in exchange for stock options, "as long as the
market's booming, you're fine. As soon as the bottom falls out,
you have worthless stock options."
While the Labor Department is concerned that employees are
treated fairly, the agency will walk on thin ice as the issue
develops, said spokesman Howard Waddell.
"In some ways, as long as the person is being paid minimum
wage, it's not our business," Waddell said.
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