“Giving stock options to employees is an innovative idea that has been unfortunately abused by some greedy executives,” Lieberman said in a press release. “But changing the accounting rules won’t change their behavior, it will only deny options to the rank and file workers who have done nothing wrong. This bill will stop the hoarding of options at the top of the corporate food chain and enable more employees to share the wealth. In doing so, it will avoid throwing out the options baby with the corporate fraud bathwater.”
Uncertain Earnings Impact
In introducing his reform bill, Lieberman reaffirmed his opposition to requiring companies to expense stock options at the time of grant. He notes that since there is no known way to reliably estimate the value of a stock option years before it is exercised, any attempt to do so would inject greater uncertainty, not less, into earnings statements.
Additionally, Lieberman said that requiring an immediate expensing of options would do nothing to change the behaviors of executives who commit fraud. Instead, he said that action would only keep companies from granting options to the rank-and-file workers.
As an alternative, Lieberman notes the “Rank and File Stock Option Act” would alter the way that options are allocated, sold and approved, through three key reforms:
Promoting Broad-Based Option Plans – based on legislation first introduced by Lieberman in 1993, it would bar companies from claiming tax deductions when options are exercised if the company does not offer at least half of the total available stock options to employees making less than $90,000 annually.
Requiring Shareholder Approval – by directing the Securities and Exchange Commission (SEC) to finalize rules within one year requiring majority shareholder approval of every stock option plan or stock purchase plan.
Mandating Holding Periods – by directing the SEC to make regulatory and legislative recommendations on the need for new rules requiring top executives to hold their stocks for a set period of time and forbidding executives from selling their shares while still employed by the company. Lieberman says these measures would reduce the incentives for executives to manipulate earnings.
Lieberman noted that according to the most frequently cited statistics, between 7 and 10 million Americans currently hold options, but that the clear majority of options are concentrated in the hands of top executives.
“The 1990s showed us that stock options are a valuable tool for attracting talent and spreading wealth, because they give employees a greater stake in their companies,” Lieberman said. “While there clearly is a real problem with executive abuse of options that demands a real response, the solution isn’t to take away options but to take away the incentives to fraudulently jack up earnings and share prices. And the best way to do that is to break the options monopoly at the top and thereby accelerate the revolutionary democratization of capitalism in this country.”