Despite New Financial Rule, Options Will Still Have Their Place

By Staff Report

Dec. 23, 2004

Options aren’t dead.

That’s the word from one Mellon analyst, despite an accounting change that will create a more unfavorable climate for companies like Coors and Sun Microsystems that use options as a recruiting and retention tool.

Last week, the Financial Accounting Standards Board said that companies have to subtract the cost of stock options from their earnings. Public companies must start expensing options beginning with their first fiscal reporting period after June 15, 2005.

Ted Buyniski, principal at Mellon’s Human Resources & Investor Solutions, says that “for many companies, options will remain the most efficient equity compensation tool.” Similarly, Mellon senior consultant Brett Harsen says that there will be a decrease in the preference for stock options now, “but it may be an overstatement to call it ‘drastic.’”

Partly because restricted stock receives less favorable tax treatment, Harsen believes that options may still be a popular option for giving awards to lower-level employees. “The bottom line is that options will still very much have their place,” he says.

Competing with Asia
One observer who is pessimistic about the future of stock options at U.S. companies is Rory Knight, a stock option expert and dean emeritus of Templeton College at the University of Oxford. Knight, who is based in England, advises a coalition of American employers who have been lobbying against mandated expensing.

Knight says that offering options is critical to attracting, retaining and motivating employees. “It is not by chance that it’s the highly innovative sector that has options,” he says. “There’s inevitably a lot of uncertainty in that sector, and that’s why options have been such a useful innovation in allowing bright people to take more risk than they otherwise would.”

Established employers will move quickly to reduce their use of stock options following the FASB’s decision, he says. Some companies that are looking to go public might now delay their IPOs because their financial histories will look “lousy,” Knight says. Europe, he says, may enact similar standards as the United States, leaving the West at a competitive disadvantage to Asia.

This comes at a time when many employers are busy trying to comply with the Sarbanes-Oxley Act. If anything’s certain following these two shocks to business accounting, it’s that the job market for finance professionals is likely to remain strong.

Congress on hold
A spokesman for Sen. Mike Enzi, a Wyoming Republican who wants to require expensing only for the top five executives at a company, tells Workforce Management that the legislator does not believe that FASB listened carefully to the concerns voiced by the business community.

The senator isn’t sure of the next move he’ll make on the issue. Enzi, like many other members of the U.S. Congress, is in his home state for the holidays, making it highly unlikely that lawmakers will act on stock-option expensing before February. Jameel Aalim-Johnson, chief of staff for New York Congressman Gregory Meeks, says that Rep. Meeks “doesn’t actually want to step on the feet of FASB and have Congress become the body that sets accounting law,” but at the same time, “stock options have become such an engine of attracting talent where [companies] otherwise might not be able to.”

Mellon’s Buyniski and Harsen say that members of Congress–especially those from California–may try to undo the accounting rule when lawmakers return to Capitol Hill, but they’re not likely to succeed. “I doubt that Congress would overrule the FASB on something that is considered ‘good governance,’ ” Buyniski says.

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