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Tech Industry

Senator proposes stock option reforms

Joseph Lieberman introduces the Rank and File Stock Options Act, seeking fair play in compensation programs popular in the technology industry and elsewhere.

A bill introduced in the Senate on Thursday proposes reforms in stock option programs.

Such programs, popular in the technology industry for employee compensation, have fallen under attack in the wake of recent corporate accounting scandals.

The Rank and File Stock Options Act, introduced by Sen. Joseph Lieberman, D-Conn., encourages companies to distribute options more equitably among executives and rank-and-file workers. It also urges regulations that would forbid executives from selling their shares while still employed by their company and would require shareholder approval of stock option plans.

The proposed legislation comes amid a heated debate about stock option programs.

Some politicians and business leaders argue that the unbridled granting of stock options harms shareholders, clouds the picture of companies' financial health, and contributes to bookkeeping shenanigans by executives eager to inflate the worth of their shares--of which they often own copious amounts.

Detractors of stock option programs have argued that to curb such abuses, companies should be required to account for stock options as an expense against earnings, thereby encouraging a more measured use of them. But legislators were unsuccessful in attempts to make the expensing of stock options a part of the corporate governance reform bill, signed by President Bush this week.

Technology companies have been among the most vocal in their opposition to such changes. A few, however, have broken ranks, most notably Amazon.com and Computer Associates International.

Expensing of stock options would only prove detrimental to rank-and-file workers who have benefited from broad-based stock options that are prevalent among high-tech companies, say groups such at TechNet, a technology industry lobbying firm representing Microsoft, Hewlett-Packard, Cisco Systems and others. Companies would be forced to cut back the number of options they grant under the proposed rules or suffer a major decline in profits, TechNet asserts, and those options issued to ordinary employees would be the first to go.

Lieberman's bill sidesteps the accounting debate. Instead, it includes measures to encourage broad distribution of options and accountability to shareholders, while reducing incentives for executives to manipulate earnings, said Adam Kovacevich, a Lieberman spokesman.

The bill would require the following:

• In order to claim tax deductions, companies must offer at least half of the total available stock options to employees making less than $90,000 annually.

• The Securities and Exchange Commission must finalize rules requiring majority shareholder approval of every stock option plan or stock purchase plan. • The SEC must recommend rules requiring top executives to hold their stocks for a set period of time and forbidding them from selling their shares while still employed by the company.

"Giving stock options to employees is an innovative idea that has been unfortunately abused by some greedy executives," Lieberman said in a statement. "But changing the accounting rules won't change their behavior. It will only deny options to the rank-and-file workers who have done nothing wrong. This bill will stop the hoarding of options at the top of the corporate food chain and enable more employees to share the wealth. In doing so, it will avoid throwing out the options baby with the corporate fraud bathwater."

Between 7 million and 10 million U.S. employees currently hold options, but the clear majority of options are concentrated in the hands of executives, according to the National Center for Employee Ownership, a nonprofit research organization that focuses on compensation issues.

Lieberman previously drafted a similar bill, which included a provision requiring companies to distribute half their available options to rank-and-file workers or forgo tax benefits, but it was defeated in 1993. Lieberman believes the time is right to reintroduce the idea, Kovacevich said.

"We believe that there has obviously been a number of recent instances of executive abuse of stock options," he said. "There has been greater light shone on problems with plans that are too heavily weighted toward executives."

Lieberman, whom the technology industry generally views as an ally, is against requiring companies to expense options. The bill indicates that the stock options debate is not disappearing from the political spotlight, despite the failure of related bills recently.

Representatives from TechNet and the Information Technology Association of America (ITAA), another tech industry association, said they are still forming their positions on the bill. But both view it as generally more palatable than expensing options.

"The message has to be taken seriously," said Harris Miller, president of ITAA. "When friends tell you things need to be changed, you have to listen."