Tech Firms Urge Congress to Block Stock Option Rule

With stock options one of Silicon Valley’s most prized perks, tech companies are fighting hard to block an accounting change that could undermine the popular form of compensation.

It’s far from clear that the tech industry’s campaign will succeed. But industry executives and their supporters in the California delegation made their case Tuesday, arguing during a congressional hearing that requiring companies to report stock option grants as expenses would erode their usefulness as tools for attracting and rewarding employees.

Requiring options expensing could make options far less available and “undermine the entrepreneurial spirit,” Rep. David Dreier (R-San Dimas) said.

But an influential regulator testified that his agency would probably continue to move in that very direction. The Financial Accounting Standards Board plans to propose this year a rule for expensing stock options. The rule, which has influential backers such as investor Warren Buffett, could take effect in early 2004.

“There’s not a subject on our current agenda for which we’ve received more strong and heartfelt calls for action,” FASB Chairman Robert H. Herz said.

To many, stock options have come to symbolize the hefty compensation enjoyed by senior corporate executives. Investors are entitled to a clearer sense of the options’ cost, some argue.

Others say options are a potent ingredient in America’s formula for competitive success. The tech industry has worked hard to round up legislative support; prominent industry figures, such as Menlo Park venture capitalist John Doerr, have been outspoken opponents.

Tuesday’s debate at a House Financial Services subcommittee hearing showed that the controversy might intensify as the FASB comes closer to issuing a rule.

A stock option typically gives the holder the right to buy a certain number of shares of stock at a set price during a specified time. If a stock soars in value beyond the option price, a commonplace event in the late 1990s, the holder can reap big profits by exercising the options.

Much of the resistance to treating options as a business expense is centered in Silicon Valley, where stock options have become a common currency for rewarding employees -- especially at start-up companies that may be short of cash but long on potential.

Opponents maintain that there is no reliable way to value stock options, and that the requirement could distort a company’s financial picture rather than clarify it.

Moreover, booking stock options as an expense can cut into profits. In 2002, according to a study by UBS Warburg, the tech industry’s operating earnings would have been 68% lower if stock options had been treated as an expense.

At Tuesday’s hearing, Craig Barrett, chief executive of Santa Clara, Calif.-based Intel Corp., argued that expensing options would be so costly that companies might choose to limit options to senior managers rather than spread them more broadly throughout the workforce.

“The movement toward broad-based employee ownership will come to a halt,” Barrett said. “It means start-up firms won’t be able to offer employees a stake in the company’s future success. The economic harm of stock-option expensing cannot be overstated.”

Deborah Nightingale, a project manager with Sun Microsystems Inc., the Santa Clara, Calif.-based computer firm, said options help cement the bond between workers and their employer.

“Stock options are a key reason that I came to work at a high-tech company and a key reason that I stay at Sun,” she said. “Has it attracted employees? Absolutely.”

In March, the accounting standards board said it intended to develop a rule that would require companies to report stock options as an expense. Some companies, including General Electric Co. and General Motors Corp, already have begun to do so voluntarily.

Dreier and Rep. Anna G. Eshoo (D-Atherton) sponsored legislation that would require companies to disclose more information about stock option grants without requiring them to treat options as an expense. The legislation also would place a three-year moratorium on the FASB’s attempt to implement required expensing.

Forcing options expensing “would be misleading to investors and shareholders alike,” Eshoo said Tuesday. In her Silicon Valley district, she said, fledgling start-ups with little capital “use stock options to attract and retain bright and talented employees critical to that company’s success.”

Herz, the FASB chairman, said his group wouldn’t issue a final rule until all sides have a chance to be heard. But he also suggested that the current situation, in which stock options aren’t treated as expenses, was the odd exception to other forms of stock-based compensation for which expensing is required.

It would be a “dangerous precedent,” Herz said, for Congress to intervene in what he described as an accounting issue. Some on the panel, however, said Congress had a legitimate stake in the economic consequences of such a policy change.