Stock Options for Executives Threatened by Panel’s Action : Windfalls: Accounting board proposes to make corporations deduct the lucrative perks from their profits.
Reflecting the controversy over sky-high executive pay, the organization that sets America’s accounting rules Wednesday proposed to make it far costlier for corporations to grant lucrative stock options to their employees.
Over opposition from big business and shareholder advocacy groups, the Financial Accounting Standards Board tentatively voted to make corporations deduct from their profits the value of stock options they grant to managers and other workers starting in 1996.
That would lower corporate earnings and discourage companies from granting executives the kind of options packages that have generated so much criticism in recent years.
Proponents of the board’s action have argued that it would make financial statements more honest and cut down on the windfalls enjoyed by many American chief executives, who are by and large the highest paid in the world.
Stock options are a popular perk for top corporate executives. Thus, Walt Disney Co. Chief Executive Michael D. Eisner reaped $197 million in stock option gains last year, and Hospital Corp. of America chief Thomas F. Frist Jr. collected $126 million through exercising his stock options.
Opponents worry that the FASB action will make it harder for start-up companies to get off the ground because those firms often rely on options to attract talent when they cannot afford to pay large salaries. And supporters of options like them because it gives executives a powerful incentive to make a company’s stock go up.
Stock options are contracts bestowing the right to buy a company’s stock at a later date, usually at a fixed price. When the stock’s market price rises above the option price, the holder can make a large profit.
Now, options granted to a limited number of top corporate officers are only disclosed in proxy statements, and their value is not charged against earnings. However, FASB’s rule change would require companies to estimate a cash value for the option and deduct that from corporate earnings.
The rationale is that options do have value. Various stock options trade in the securities markets daily. And if a company gives an executive cash, that reduces its earnings.
In recent years, stock options--once enjoyed mostly by top executives--have made their way down the corporate ladder, as an increasing number of companies provide the incentive to large portions of their work forces.
For instance, more than half of all small- and medium-sized biotechnology and computer firms offered stock options to all of their employees, according to a 1991 survey conducted by Share Data Inc., a Sunnyvale, Calif., firm that makes computer software to manage stock option programs.
Little known outside the world of business, the FASB makes rules that have far-reaching consequences. Its policy on accounting for retiree health benefits, for example, led to huge profit reductions by many major U.S. corporations. Some firms decided to reduce or even eliminate the benefits.
In tackling the issue of stock options, the board managed to bring together a couple of strange bedfellows: business and shareholder advocacy groups.
“I don’t think this makes any sense at all,” said Joseph W. Kelly, chief executive of Crop Genetics International, a Hanover, Md., biotechnology company whose 100 employees all get stock options. “I’m in favor of telling the investor what he wants to know through footnote disclosure. But for me to assign some arbitrary number (to stock option values) makes no sense at all.”
“We don’t think a charge against earnings is necessary,” said Ralph W. Whitworth, president of the United Shareholders Assn. “There’s a less Draconian approach.”
The accounting board, based in Norwalk, Conn., also agreed to require footnote disclosure of stock options in financial reports published as soon as next year.
The board’s actions were not final. Rather, they clear the way for FASB to circulate its proposals for comment over the next few weeks before a final board vote.
“There is a possibility that the rule might be altered,” said Timothy S. Lucas, FASB’s director of research.
Until now, companies that granted stock options left their value unstated on the grounds that there was no way to tell what a stock option might be worth in the future.
Although the proposal has produced much hand-wringing, experts said the precise financial impact of the rule change remains unknown.
However, implementation of FASB’s stock option rules might force companies to retool their lucrative executive compensation plans, which have received widespread public attention in recent months amid shareholders’ protests over excessive executive pay.
Some warn that any widespread curtailment of stock option plans could hurt the ability of companies to attract talent and could crimp entrepreneurship.
Bernard V. Vonderschmitt, president of Xilinx Inc., a San Jose semiconductor maker that offers stock options to all 550 of its employees, said of the FASB plan: “This will slow the growth and birth of small and emerging companies; it certainly will impact us by a significant amount.”
But FASB has supporters.
“I consider this a step in the right direction,” said William J. Bruns Jr., a professor at Harvard Business School. “It has always seemed mystifying to me that something that has such great value to executives has been treated by accountants as if it had no cost. Financial statements ought to give investors some evidence” of the cost of stock options.
