Senators Introduce Option Expense Limit Bill

The bill would head off Financial Accounting Standards Board (FASB) rules that would require companies to consider all employee stock options as an expense. The FASB 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 (See    FASB: Option Expensing Begins in 2005 ).

A bipartisan group of Senate backers told a news conference that their measure would allow companies to continue to attract skilled employees with stock options while also dealing with investor and shareholder concerns about executive compensation, according to an Associated Press report.

“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 Senator Mike Enzi, (R-Wyoming)   He was accompanied by Senators Barbara Boxer (D-California), Harry Reid (D-Nevada), John Ensign (R- Nevada) and George Allen (R-Virginia).

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 – particularly tech companies in Silicon Valley.

Measuring Options’ Value

Though many large companies have voluntarily begun counting options as an expense, many high-tech companies have not, insisting that 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 carry a cost that needs to be recognized on company books.

Private equity groups such as the National Venture Capital Association praised the latest bill, saying it “aims to preserve broad-based employee stock option plans and addresses the serious economic implications of stock option expensing.”

Corporate governance organizations, however, weren’t so happy. They argued 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 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.”

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