NECO: Option Expensing Will Cut Grants to Nonmanagment Workers

That is the meat of the National Center for Employer Ownership’s (NCEO) analysis of surveys on stock option expensing and moves companies are planning to make if expensing becomes mandatory. In fact, nearly four out of 10 corporations have plans to either eliminate stock option awards to nonmanagement employees or make them unappealing to that group, while nearly no employers indicated that options awards would be eliminated for executives .

The NECO worries that such a move could have devastating effects to corporations as a whole. By taking away stock option awards for the masses, companies will also see improvements in corporate performance provided by the broad-based programs evaporate.

This comes, even though NCEO’s analysis shows mandatory stock option expensing would have little or no effect on stock prices. The NCEO cites other empirical studies that found the market already incorporates expensing data into stock price, which NCEO said means a company that already has high expensing costs in its footnotes is not likely to see a hit to its stock price when it has to move costs to its income statement, once expensing is required.

Companies currently are required to include information about stock options only in the footnotes of financial statements, though the Financial Accounting Standards Board (FASB) appears poised to require that options be expensed(See FASB: Option Expensing Begins in 2005 ).Opponents of mandatory expensing have said it will mean the end of broad-based equity plans, that it is impossible to accurately value options since formulas being proposed are overly complex, and that current earnings per share disclosure rules are adequate (SeeBlack-Scholes Overvalues Stock Options ) .

“The ironic result is that expensing could further concentrate ownership in the hands of a small number of highly paid people, arguably precisely the opposite consequence that at least some options reformers had in mind,” the brief said. “If companies do what they are telling these researchers they intend to do, it will make a mockery of corporate reform, as senior executives simply find new ways to use reform to argue for their advantage.”

The complete brief can be ordered at http://www.nceo.org/pubs/futurebroad.html .