Mindmeld, how can you fight the 'International Employee Stock Option Coalition'??? Give it up, the game is rigged, your only chance is to join us traders, dance around stocks daily, take profits, and stay flat overnight, avoiding those 'sure to occur' earnings bombs and gap down openings....
Best regards,
John <ggg>
March 17, 2002
Battle Lines Drawn on Stock Options
By DAVID LEONHARDT
WASHINGTON, March 14 — American corporations are mobilizing to defend their stock options.
The country's largest industry groups have formed the International Employee Stock Option Coalition to promote the benefits of options. Forty technology executives — from Cisco Systems (news/quote), Hewlett-Packard (news/quote), Microsoft (news/quote) and other companies — departed from the original agenda of their meetings with cabinet secretaries and Congressional leaders earlier this month and spent most of the time talking about options. Lobbyists and executives are calling senators and their staff members and warning that changing the laws that cover options would damage economic growth.
The collapse of Enron (news/quote) and Global Crossing — companies that generously handed out options to top executives, some of whom sold large amounts of stock before the businesses failed — has reignited a debate about options. And those events have given life to a seemingly defeated effort to rewrite accounting rules and force companies to deduct from their profits the estimated cost of the options they give to employees.
But in recent weeks, with Enron officials no longer appearing before Congress daily, executives have become more aggressive about making a case that stock options have been an important part of the economic success of the United States over the last decade.
Options give their holders the right to buy shares in the future at a specific price, typically at the price of the stock when the option was granted. If share prices rise above the exercise price, an executive can use the options to buy the stock and sell the shares immediately, pocketing the difference, which can be substantial. Unlike other forms of pay, however, options do not appear as an expense on a company's income statement. A change like the proposed law could reduce corporate earnings, over all, by almost 10 percent, analysts say.
A bipartisan group of five senators has proposed a bill that would effectively force the change, and an international accounting oversight group is also considering a rule to require a charge. Alan Greenspan, the Federal Reserve chairman, publicly supported the idea this month.
"The level of concern is very high," said Caroline Graves Hurley, director of tax policy at AeA, a trade group for technology companies like Intel (news/quote), Microsoft and Sun Microsystems (news/quote). "There are lots and lots and lots of meetings going on." A Congressional aide who insisted on anonymity added, "The high-tech community is going ballistic."
It has reason to worry. At Cisco, for example, options would have reduced operating earnings by 40 percent in 2000 if the proposed change had been in place, according to the investment firm Bear, Stearns. The decline would have been 32 percent at Lucent Technologies (news/quote) and 14 percent at WorldCom (news/quote). Global Crossing's $1.4 billion loss would have grown to $1.9 billion. In a two-pronged attack, corporate lobbyists are emphasizing the benefits of options and arguing that the proposed changes would hurt rank-and-file workers while increasing corporate taxes.
Analysts say the criticism — from a broad coalition that includes the the United States Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers and the National Retail Federation — has helped shift the debate and has created an uphill fight for the Senate bill. The efforts of accounting regulators are seen to have better, though uncertain, odds.
"This is about executives' personal paychecks, so they'll pull out all the stops," said Sarah A. B. Teslik, executive director of the Council of Institutional Investors, an organization of pension funds and other investing institutions whose leaders support the bill. Ms. Teslik added that recent lobbying has not swayed the council's support for an accounting change.
The core of the executives' arguments is that options awards have become far more widespread in recent years, giving employees an incentive to make their companies more profitable.
"Stock options bind employees' interests with shareholders' interests," said Tom St. Dennis, chief executive of Wind River Systems (news/quote), a software maker based in Alameda, Calif., that gives options to all of its 1,800 employees. "The opportunity for people to realize a reward is a strong incentive for companies to take risks and innovate."
If companies had to take a charge to earnings for the awards, many employers would decide that giving options to their workers was too expensive, the executives say. The executives themselves, who have more bargaining power, would be less affected, they say.
About 1.7 percent of the nation's workers received stock options in 1999, according to a Bureau of Labor Statistics study. Industry officials dispute the study's findings, saying the number is higher.
With some exceptions, top executives are not making their case publicly, to avoid creating the impression that their chief concern is their own multimillion-dollar pay packages, their lobbyists say.
Enron's demise helped put the issue in the spotlight because the company paid many managers largely through stock options, which helped earnings by having no reported cost. Enron then received tax deductions, similar to the credits companies get for paying cash salaries, when its employees exercised their options, helping the company avoid paying income tax four of the last five years.
The Senate bill would limit the tax deductions that companies can take to the amount of money they estimate options cost. Companies that continued to report that options had no cost would not be eligible for deductions.
"There's a double standard here," said Senator Carl Levin, Democrat of Michigan, who sponsored the bill with Senators Mark Dayton, Democrat of Minnesota; Richard J. Durbin, Democrat of Illinois; Peter G. Fitzgerald, Republican of Illinois; and John McCain, Republican of Arizona. "Options are a form of compensation, and they should be treated like every other form of compensation," Mr. Levin said.
Corporate lobbyists argue that options, unlike salary, require companies to spend no cash and, therefore, should not be subtracted from profits. When converted into stock, options dilute the stake of existing shareholders. Typically, when companies issue a new share of stock, they receive all of the sale price, except for underwriting expenses, but with an option, they forfeit much of the value of the share to its owner. Corporate lobbyists say that investors can take the dilution into account because companies publish the number of options outstanding.
In addition, company officials are telling policy makers that the Senate bill would either destroy the earnings of successful companies or effectively raise their taxes. If a company waited to take a charge against earnings until after employees exercised their options, the charge could become enormous if the stock had appreciated rapidly.
If companies instead used a common formula to estimate the value of the options when they granted them, as they do now in a footnote to their proxy filings, they would be limited to a tax deduction the same size as the estimate. For companies with fast-growing stock prices, the value of options at exercise would exceed the original estimate. But the companies' deduction would be capped at the amount of the estimate.
"We need to recognize the result is that we're raising taxes," said Ken Glueck, vice president for government affairs at Oracle. "I'm happy to have that debate."
Both sides expect Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, to hold a hearing on the bill in coming weeks. Mr. Baucus is inclined to oppose the measure, but thinks lawmakers should consider whether options should be counted against earnings, Michael Siegel, a spokesman for the committee, said.
The International Accounting Standards Board, based in London, plans this year to consider ways to estimate the cost of options. Its members generally agree that the current practice is not adequate.
"The board is pretty clear it's an expense," said Sir David Tweedie, the board's chairman.
The international board does not have jurisdiction over American companies. If it made a change, however, the Financial Accounting Standards Board in the United States would be more likely to attempt a similar one.
When the American board raised the issue in the mid-1990's, the Senate effectively forced it to back down, after intense lobbying from businesses. |
