Congress has long considered legislation to change the way stock options affect a company's bottom line and reduce the number of options that companies award to workers. Stock options allow employees to purchase a company's stock at a set price for a specified period of time, such as five or 10 years. When the stock price increases, the potential profit to the employee increases. But stock option reform has taken on new urgency in wake of the Enron bankruptcy and demise. The Houston-based energy giant reportedly failed to pay any US taxes four out of the past five years -- during which time it earned $1.8bn -- in part due to $600m in stock option tax deductions which were never reported as an expense on its financial statements. Levin and the bill's other sponsors say that Enron stockholders would have learned the company's income was one-third less than the $1.8bn it disclosed had the company been forced to report this deduction. "Enron was not acting illegally here, nor were its actions unique," Levin said. "It took advantage of the tax provisions -- which we hope to change in our bill -- that allow a company to claim a stock option expense on its tax return even if the company never lists that expense on the company books. These tax provisions incomprehensibly and indefensibly allow companies to tell Uncle Sam one thing and their stockholders something else." It's unlikely opponents in the Silicon Valley will be able to stall the bill, which enjoys support in both parties of the Senate. The tech sector has had mixed success in thwarting such legislation in the past. The last major battle took place in 1996, when the Financial Accounting Standards board began requiring companies to at least footnote in their annual report what their earnings would have been if they charged their options against their compensation expenses. The tech industry lobbied against the requirement. Tech lobbyists are not likely to get help opposing the newest bill from public policy groups and trade organisations, including the Council of Institutional Investors. Members of the influential organisation, including pension fund managers and portfolio mangers of mutual funds, will vote in March to determine whether a policy change is needed. "Option grants out of control"
"The feeling is that maybe the earlier efforts aren't working," said Peg O'Hara, a spokeswoman for the council. "The disclosure by companies doesn't seem to be working. The size of option grants have gotten out of control, and a standard valuation method for the options is needed. There's a sense that if a company is not willing to take the expense off their bottom line, then maybe they shouldn't grant them." The Association for Investment Management and Research is also considering whether to endorse the bill. The trade group for financial analysts, portfolio managers and investment advisors recently surveyed nearly 2,000 of its members, and 80 percent said stock options are compensation and should be recognised as an expense on income statements rather than a footnote, according to the survey. The organisation also found that 81 percent of its survey participants use information about stock options when evaluating a firm's performance and assessing its value. The International Accounting Standards Board is also soliciting comments from its members on developing a global accounting standard for treatment of stock options as compensation. The comment process is anticipated to last for several months. The organisation found that few countries have standards for accounting for stock options. But those that do have reviewed the issue have concluded that stock options should be counted as an expense in companies' income statements. It's difficult to overstate the sweeping changes that a stock options bill would have on American companies and the national economy. If all of the Standard & Poor's 500 index companies accounted for options as an expense, earnings would have plunged 9 percent in 2000, according to the most recent data by investment banking firm Bear Stearns. The tech sector would have done substantially worse. The PC networking sector would have seen its earnings lowered by 89 percent. The communications industry -- not including Nortel -- would have suffered a 32 percent drop. Computer software and services would have seen its earnings lowered by 30 percent, according to Bear Stearns. "The more volatile the market and more options granted, the greater the impact to earnings," said David Zion, an accounting analyst with Bear Stearns.
See the Finance News Section for the latest financial news in the high-tech sector.
Have your say instantly, and see what others have said. Go to the Finance forum.
Let the editors know what you think in the Mailroom.
