Is forcing corporations to expense employee stock options really a bigger threat to the U.S. economy than Al Qaeda?
That’s what one foe of the proposed accounting policy change claimed in a recent comment letter to the Financial Accounting Standards Board. “This . . . has the potential to create far greater damage to the United States economy than the combination of all events relating to Osama bin Laden and Saddam Hussein,” proclaims Robert Weiss, CFO of Lake Forest, Californiabased medical products maker Cooper Cos.
Such are the stakes in the pitched battle between fast-growing, options-granting companies and FASB, which later this month is expected to propose that companies record options grants as expenses in their financial statements.
When FASB floated the idea of expensing stock options in the mid-1990s, the board itself was nearly legislated out of existence. Business lobbyists and critics in Congress argued that FASB was threatening the entrepreneurial lifeblood of the economy. “Last time they wanted to put FASB out of business,” says Dennis Beresford, a University of Georgia accounting professor who chaired the board from 1987 to 1997. But in the wake of the accounting scandals of the past three years, opposition is likely to be more subdued.
Nevertheless, comment letters are once again warning of dire consequences if the standard is adopted. “It will undermine the entrepreneurship and innovation for which the United States is the envy of the world,” writes William Rastetter, CEO of Cambridge, Massachusetts-based biotech firm Biogen IDEC. Asserts Alan Shuler, CFO of Minneapolis smart-card technology company Datakey, “There will be extremely harmful effects on the technology sector and small business in general.”
But this time around, FASB is likely to win. For one thing, most of the rest of the world will soon be expensing options. Last month the International Accounting Standards Board mandated that companies under its jurisdiction expense all share-based compensation. And more than 500 U.S. companies have begun to voluntarily expense options, putting pressure on others to follow suit. What’s more, legislators are now less apt to fight reform.
“FASB didn’t have the political backing for this before Enron -- now they do,” says Watson Wyatt consultant Ira Kay. He expects the new rule to accelerate the move away from options and toward restricted shares, which provide more incentive bang for the expense buck. The value of options granted, already down from $140 billion in 2000 to about $80 billion last year, would drop to $30 billion or $40 billion by 2007 if expensing were mandated, says Kay.
Last September, Microsoft replaced its options program with outright share grants. In February, IBM said it would issue executives options with an exercise price 10 percent above the market price. Such performance-based options, common in Europe, have to be expensed in the U.S. But even as Microsoft and IBM adapted, Intel CEO Craig Barrett argued against change. “We’re legislating out of existence one of the things that helped make the United States the most competitive country in the world in the high-tech arena,” he said in a recent speech.
Other issues, such as how to value options, must still be ironed out. Nevertheless, consultants expect the standard to be in force by next year. “I think most companies have accepted that this is going to happen,” says Paula Todd, an executive compensation consultant at Towers Perrin. “You can’t put the genie back in the bottle.”
But that isn’t stopping some executives from trying.
