The chilling effects of stock option expensing

Charles Cooper's recent commentary on stock options has generated a fair amount of reader comments.

But the column failed to note that if the drive to expense employee stock options succeeds, financial statements will become worse, not better.

It will mean the end of many broad-based options programs, curtailing the American innovation and creativity that sets us apart globally, and that fundamentally, America's workers, businesses and overall economy will pay the cost.

Mandatory expensing is a bad idea for many reasons, and here are the top 10 (in reverse order) to consider:

10. FASB can't consider the economy
The Financial Accounting Standards Board wants to mandate the expensing of options but admits that as a board of accountants, it can't--and won't--assess the economic impact of its decision.

The U.S. Senate needs to act to keep this dream alive.

Silicon Valley Rep. Anna Eshoo warns that "without immediate action by Congress, FASB's ill-advised mandatory expensing rule will go into effect without any examination of its impact on American workers, their employers or the U.S. economy, leaving the future of this important employee benefit in doubt."

9. A chilling effect
A February survey by Deloitte Touche Tohmatsu found that 75 percent of companies surveyed intended to reduce the use of employee stock options. The primary reason for this shift? The cost impact of expensing the options.

8. Don't stifle productivity
Rutgers University professors Joseph Blasi and Douglas Kruse found that "employee ownership improves a company's productivity level by about 4 percentage points and that total shareholder returns increase by some two percentage points, relative to other firms. Profit levels--as measured by return on assets, return on equity and profit margins--jump by about 14 percent."

7. It's not just high tech
Companies across the country and from many industries believe that the FASB is wrong--including J.C. Penney, Gap, Human Genome Sciences, Pfizer, McDonald's, Starbucks, Staples and the Vermont Teddy Bear Co.

6. There's another way
The House of Representatives voted 312-111 for the Stock Option Accounting Reform Act. This bill requires the immediate expensing of a company's top five executives' stock options.

Ninety percent of the 14 million Americans who receive options are nonmanagers.

Small businesses are exempted from this obligation and cannot be required to expense options for the three years after an initial public offering. The bill requires a federal economic impact study of the effect of expensing options, before any further expensing measures are taken, along with new disclosure rules for companies that offer options. Similar legislation is now before the Senate.

5. Employees have spoken
Hundreds of companies and thousands of employees representing millions of working Americans have expressed their concerns. FASB received more than 6,000 comment letters, many from rank-and-file workers. More than 90 percent of the letters opposed the option-expensing scheme.

4. Barons of Silicon Valley? Ha!
Charlie Cooper's column called the people who receive employee stock options "barons." Nothing is further from the truth. Ninety percent of the 14 million Americans who receive options are nonmanagers.

3. It's bad accounting
FASB can't devise a model for accurately valuing employee stock options. Cisco Systems tried to use the proposed model and came up with numbers that varied 365 percent. William Sahlman, a Harvard Business School professor, says, "If anything, expensing options may lead to an even more distorted picture of a company's economic condition and cash flows than financial statements currently paint."

2. No iPod?
Without employee stock options, will we get the next Google, eBay or Apple Computer? Will employees be willing to work and think like owners if they don't have a chance to become owners? Andy Bechtolsheim, co-founder of Sun Microsystems, has said that without options, three out of four Silicon Valley start-ups would have likely failed. Without stock options, many would-be market drivers will never reach their potential, lacking both the incentives and pride of ownership needed to make the leap from upstart to powerhouse.

1. The American Dream
Says Cisco employee Ken Platt in a letter to the FASB: "I have worked as a small child, harvesting and packing produce in Arizona, as a young teenager working to help grow the family business, as a U.S. Navy diver and 20-year veteran, struggling to provide for my family, attending school at night and spending many months away pulling duty overseas, protecting our country...As a productive member of Cisco, I am just now beginning to see the fruits of my labors, the beginnings of success and to realize the American Dream. Now you want to take this away from me?"

The U.S. Senate needs to act to keep this dream alive.