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House panel: Don't fiddle with stock options

Congress members vote against controversial expense-reporting proposal.

Stock options awarded to employees of U.S. firms would not have to be expensed, according to a proposal that a House of Representatives panel approved Tuesday.

The Committee on Financial Services voted 45-13 to bar federal securities regulators from recognizing a recent proposal by the Financial Accounting Standards Board that would list the cost of employee stock options in corporate income statements as of next year.

When employees cash in stock options, the process dilutes the value of existing shares, making each one worth a tiny bit less. Under current FASB rules, companies are required to disclose option grants in footnotes. FASB's new proposal says companies must treat exercises of stock options as expenses, which would mean that they would report reduced profits to shareholders and likely grant fewer options to new employees.

High-tech and venture capital trade associations have backed the House bill to block those changes. Current practices, they say, provide investors with enough information to calculate the financial impact of employees exercising stock options. And the options are an important part of business that shouldn't be discouraged, they added.

"Employee stock options fuel innovation and economic growth in this country," Rick White, chairman of Silicon Valley advocacy group TechNet and coordinator of a pro-stock options coalition, said after the vote. "The Republicans and Democrats who voted for this legislation today recognize that employee ownership is an American value that should be preserved, not destroyed."

Foes of the measure who prefer mandatory expensing call current accounting practices a deliberate distortion. Legendary investor Warren Buffett wrote in a New York Times op-ed: "Without blushing, almost all CEOs have told their shareholders that options are cost-free. When a company gives something of value to its employees in return for their services, it is clearly a compensation expense."

The House bill would require the expensing of stock options granted to a company's CEO and four other top executives, if the company had annual revenue of at least $25 million.

While technology titans such as Intel, Cisco Systems and Sun Microsystems strenuously oppose mandatory expensing, some of their peers have agreed to do it. Amazon.com said in 2002 that it would treat options as an expense, and Hewlett-Packard shareholders voted this spring to do the same. Microsoft announced last year that it would give new employees actual stock instead of options to buy.

A proposal similar to the House measure is being weighed in the U.S. Senate, which is believed to be less inclined than the House to overrule any decision made by FASB.