Tech workers rally against expensing options

PALO ALTO, Calif.--Stock options helped single mom Teresa Lopez buy a house, buy a car and create college funds for her kids.

And at a rally here Wednesday against a proposal to require companies to "expense" stock options, the Cisco Systems sales account manager warned that others in her situation will not be as fortunate if the plan from the Financial Accounting Standards Board passes.

"The next single mother is not going to benefit," Lopez told a crowd numbering in the hundreds, many of whom had been bused in by other technology companies. "Stock options are not about accountants out in Connecticut (where the FASB is based). Stock options are about me. And they're about you."

Thursday's rally was organized by technology industry groups including TechNet and aimed at putting a human face on a heated but somewhat arcane debate over how to account for employee stock options. Stock options give workers the ability to buy a share of stock at a certain price. When employees cash in stock options, the process dilutes the value of existing shares, making each share worth slightly less money.

Under current rules, companies can disclose the expense of employee stock options in footnotes to financial statements. But earlier this year the FASB, a private group that sets accounting standards, proposed that all forms of share-based payments to employees, including stock options, be recognized as a cost in the income statement.

The board said it is aiming to provide clearer information for investors and that the move would better align U.S. rules with international accounting standards.

But the proposal has drawn fire from the tech industry, which has relied heavily on stock options as a form of compensation. If companies were required to expense stock options, the industry argues, earnings could suffer a large hit. That in turn would force companies to stop issuing options to rank-and-file employees, the industry says, and ultimately crimp America's ability to come up with innovative products.

Another criticism of expensing stock options is that there is no good way to judge the value of options when they are granted.

Online auction company eBay on Thursday said its shareholders rejected a proposal requesting that the company expense the cost of stock options in its annual income statement.

Not all technology companies, though, have rallied around the traditional way of doling out and accounting for options. Microsoft has changed its policy to give employees grants of actual stock that vest over time, rather than stock option grants.

The issue has made its way to Washington. Tech lobbyists are lending their support to a bill called the Stock Option Accounting Reform Act, which would essentially prevent federal securities regulators from recognizing any FASB decision. It would, however, 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.

Backing the measure are legislators representing Silicon Valley. The legislation has the support of prominent Republicans as well as House Minority Leader Nancy Pelosi, D-Calif.

Those attending Thursday's lunchtime rally came from companies such as Sun Microsystems, Juniper Networks and Cisco Systems. Many wore yellow T-shirts with the slogan: "I am the face of employee stock options." The rally was held at a plaza not far from where the FASB was holding a public meeting about its draft plan.

One of the speakers at the rally was Sun Microsystems co-founder and senior vice president Andy Bechtolsheim. He said the proposed FASB rule change would hurt start-ups in particular, which often produce vital new technology. The United States can't afford to lose its capacity to innovate, given international competition, Bechtolsheim suggested. "This is the wrong time to kill stock options," he said.

[nealda]

Human Face?

Human face -- like the one on Arnold in The Terminator. This is just corporate astroturfing aimed at maintaining an accounting sham -- hiding operating expenses from investors until they get suckered. Expensing these options just allows investors to see the facts. It doesn't eliminate corporations' ability to issue options as these astroturf organizations would have you believe. Why do they want to hide their costs from their investors?

Why do they blame the FASB?

The fears of the tech industry workers could be rephrased as follows: 'Please do not change the current accounting rules because our employers will shaft us to preserve their bottom line'. Has anyone considered that perhaps the companies, and not FASB, are at fault here?

The FASB is doing a good thing in trying to force the US to use a more honest system (like that used by the rest of the world).

[alexeck]

Good for them

Why would we want to change something that has been so successful for so many years? Providing options has been a mainstay of the tech field.

I don't personally see how this makes companies "more honest". If anything, it is not a true reflection of earnings to place stock options (which are equity) into an income statement (which should reflect revenues and earnings). I can see the argument about the cost of employee compensation, but it's still equity, not an actual expense.

There is so much GAAP information on financial statements that might mislead someone, at least for people who don't understand how to read them. For example, people look at a company's income statement, and talk about how a company is losing money--when in fact, it may actually be writing off an acquisition. Or, you have capitalization increasing the profits, when the company might be draining cash (a game that WorldCom played unsuccessfully).

So then you have to look at EBITDA or a cash flow statement to get past all D&A. What are we going to have now? EBITDAO--Earnings before Interest, Taxes, Depreciation, Amortization and Options? Just silly.

Any intelligent investor looks for a company's fully diluted shares when understanding the share make-up (and fully diluted should include options and warrants). So that is the real issue: What is the fully diluted number? If this is not clear in current financial statements and share counts, it should be clear.

Otherwise, leave well enough alone.


Alex

[Nigel Johnstone]

The diluted shares speak with forked tongue

The fully diluted shares don't warn the shareholder about the options overhang that stops the price rising.

He finds that out when the price rises, the options strike, and his share of the company suddenly shrinks without warning pushing the price down. By then its too late he's been shafted by the company management. But hey he can learn later that he was shafted on the *next* accounts that show how his share of the company shrunk.

If you feel strongly that the cost of the options is really zero, then you are free to adjust the profit by this number, since it is listed in the accounts. If you're right then you'll make money while others don't.

However there's only a few holdouts, even in the tech sector against expensing.