Compromise Offered for Expensing Options

Lawmakers opposed to requiring stock options to count against a company’s bottom line introduced legislation Wednesday that would require only those options given to a company’s top five executives to be counted as an expense.

The bill was quickly welcomed by the venture capital industry but dismissed by corporate governance groups as not offering real reform.

The legislation would head off rules pending from a national accounting standards board that wants companies to consider employee stock options as an expense.

A bipartisan group of senators held a news conference to tout their compromise as a way to allow companies to continue to attract skilled employees with stock options while also addressing concerns about executive compensation.

“I think we’ve put together a bill that will solve a lot of problems ... a bill that I think will continue the kind of business advances that we’ve had in this country,” said Sen. Mike Enzi, a Republican from Wyoming. He was accompanied by colleagues Barbara Boxer (D-Calif.), Harry Reid (D-Nev.), John Ensign (R-Nev.) and George Allen (R-Va.).

The National Venture Capital Assn. praised the bill, saying it “aims to preserve broad-based employee stock option plans and addresses the serious economic implications of stock option expensing.”

But corporate governance groups said that because the legislation addressed only the top five executives, it would do little to reveal how much stock options are actually costing a company and diluting shareholder return.

“By limiting it to the top five they really do ignore the bulk of the cost to almost every company,” said Patrick S. McGurn, a special counsel for Institutional Shareholder Services, which advises on corporate governance issues. “If you wanted to rename this act it would be the ‘pander to tech companies that fill my campaign coffers’ act.”

Stock options give employees the chance to buy company stock at a fixed cost, known as the exercise price. Options become valuable as a stock rises above the exercise price.

Thousands of businesses nationwide embrace options as an inexpensive way to motivate workers, with Silicon Valley serving as ground zero for the concept.

Though many large companies have voluntarily begun counting options as an expense, many high-tech companies have not, insisting expensing stock options is a bad idea in part because there is no precise way to determine their value before they are actually exercised.

Proponents of mandatory expensing of stock options argue they are a form of compensation that do carry a cost that needs to be recognized on company books.

The Financial Accounting Standards Board, which sets national accounting rules, voted earlier this year to draft new rules requiring companies to consider employee stock options as an expense, and is expected to put them in place next year.

The bill would prevent any such standards from taking hold until an economic impact study was conducted.