Long used as a tool to recruit and retain tech workers, stock options may become more common in other industries thanks to a new House bill.
Rep. John Boehner (R-Ohio), chairman of the House Workforce Employer-Employee Relations Subcommittee, introduced a bill last week that aims to help rank-and-file employees better use stock options as a long-term savings vehicle and to encourage more companies to offer options.
"Employers and employees are beginning to tap into the awesome potential of employee shareholding, and it's time Washington began to realize its true potential for our economy," Boehner said in a statement. "If we want to help Americans build real wealth and financial security in the next century, Washington needs to recognize this trend and capitalize on it."
Granting stock options to employees is common in the tech industry and Boehner's bill could broaden their use.
The bill would create a new form of stock option that would combine elements of traditional "nonqualified" stock options and "qualified," or incentive, plans. The new stock option would allow employees to defer all taxation on stocks they purchase until the shares are sold, as workers with qualified stock options can currently do. The bill also would also allow companies to deduct the value of stock options granted to employees upon the employee's exercise of the option, as employers can do with traditional nonqualified stock options.
The bill's intent is to encourage employees to retain their stock for longer periods, while encouraging more employers to offer stock options.
"It is a move in the right direction for encouraging a broad-based employee ownership plan," said Ryan Weeden, a project director at the National Center for Employee Ownership, a nonprofit organization. The bill stipulates that the options be available to at least 50 percent of the employees.
The congressman said that the IRS tax code currently discourages workers from using their stock options as a long-term savings and investment tool. Employees with stock options take a double tax hit--once when the options are exercised and converted to shares and again when the shares are sold, Boehner said.
Many workers exercise their options and sell them immediately. The Boehner bill hopes to change that by allowing employees to exercise their stock options and convert them to shares without being taxed. Workers would be able to defer taxes on the options until they actually sell their shares, at which point they would be taxed at the applicable capital gains rate. Employees would be required to hold on to their shares for a minimum of one year in order to qualify for the new tax treatment.
"The intention of a lot of plans is to get employees wrapped up and acting and thinking like shareholders, thinking about how their actions are going to affect the company's profitability and performance," Weeden said. "I think you would see institutional investors and other shareholder groups finding stock options plans based on this bill more palatable."
The bill is still a long way from being enacted as law, as Congress is in recess until January.
The bill is clearly aimed at nonexecutive employees, and includes a series of provisions to safeguard employees who receive stock options. The legislation would prevent employers from cutting their salaries and payroll and offering stock options as a substitute for direct cash compensation. Among other precautions, the bill also will require that options be shares that are traded on exchanges regulated by the Securities and Exchange Commission.
"I don't think it will have much of an impact on how stock options are treated in Silicon Valley but it could affect how mainstream companies perceive them," said Don M. Chance, a professor of finance at Virginia Tech, Pamplin College of Business.
"When you talk about Silicon Valley, you're talking about a real exception to how stock options are used," Chance said. "If this bill can get [stock options] into the mainstream, I think it would be good idea."