Pelosi Backs Executive Option Expensing Bill

The bill, HR 3574 introduced by Representative Richard Baker (R – Louisiana), would lessen the potential impact on corporate bottom lines by having all stock compensation granted to rank-and-file employees not counted as an expense.   Pelosi was attracted to the proposal because “she thinks stock options are an important way to attract talent,” her spokesman Brendan Daley told Reuters.

With her decision, Pelosi formally adds her name to the list of 45 cosponsors of the measure.   The bill is scheduled to get a hearing Wednesday at in the capital markets subcommittee, chaired by Baker.

However, the proposed law flies in the face of soon to be introduced regulations at the Norwalk, Connecticut-based Financial Accounting Standards Board (FASB) that would require companies to consider all employee stock options as an expense. The FASB voted in late 2003 to draft new rules requiring companies to consider employee stock options as an expense (See FASB: Option Expensing Begins in 2005 ).   The nation’s accounting rulemakers are expected to issue draft rules later this month outlining mandatory option expensing procedures.  

Congressional leaders that want to stop the possible action see reason to act expeditiously, especially after the International Accounting Standards Board (IASB), the standard-setter for the industry outside the United States, approved expensing options in February (See IASB Mandates Option Expensing in ’05 ).   Already, a bipartisan group of US Senate backers introduced a similar limited option expensing measure in November, Senate Bill 1890 (See  Senators Introduce Option Expense Limit Bill ).  

Support for the Senate bill, and now the House proposal, comes primarily from Congressional representatives of technology heavy districts, where potential mandatory stock option expensing could have the biggest impact.   A host of tech companies have come out with forecasts of lower earnings with mandatory stock option expensing.   Computer maker Hewlett-Packard Co. says mandatory stock option expensing would have slashed its 2003 third quarter profits 64%.   Before the Palo Alto, California-based company came out with their numbers, NASDAQ, the primary stock exchange for technology companies, said expensing stock options could hurt small firms that do not have earnings but need to attract qualified employees as the companies in particular rely on stock options as a form of compensation.   In addition companies such as Apple Computer, Adobe, Analog Devices and Intel have come out with amended earnings releases in 2003 showing lowered earnings with mandated option expensing.

But critics blame stock options for inflating corporate earnings by tempting executives to pump up stock prices.   In fact, FASB has considered requiring their expensing before, but backed away from the idea in 1994 under pressure from the Senate.