The expensing of stock options

This is all a little over my head, but here goes…

I work for a company in West Michigan with about 2000 employees. It’s a great company to work for, and the pay and benefits are good. Two of the most-telling benefits are the employee stock purchase plan, which allows all employees to set aside a portion of their paycheck each week for a quarterly stock buy (at a slight discount) and the employee stock option plan, which is available to most (all?) salaried employees. Since our company is doing relatively well, these plans can be very beneficial for those who participate.

Recent plans by the Financial Accounting Standards Board (FASB) call for the expensing of all stock options on a companies financial reports. The reason for this is to prevent abuse of these plans by companies who lavish their upper crust with disproportionate numbers of stock options, which do no currently count as “expenses” like salaries do. (Think “Enron”.)

I’m of two minds on this subject. First off, I certainly agree that something needs to be done about this sort of abuse. The more honest and straightforward things are, the better.

But I’m not so sure that counting all stock options as an expense will have the overall effect that the FASB is counting on. Rather, I think it will simply punish the 99.9% of those who currently receive stock options fairly. If the FASB plans go through, virtually all companies who give out options today will cease to do so over night.

This is akin to addressing “road rage” by adopting rules which make it almost impossible for people to drive cars.

As long as the number of stock options (and/or their value) are noted on reports and made available to investors and the public at large, what real net benefit is there to changing the way companies report the bottom line?

In response to this FASB plan, legislation has been introduced in Congress which would limit the plan to require only the top five at each company to have their options expensed, give a three-year window to new companies, and call for more study of the economic impact of the plan.

Here is the text of a letter I sent to my representatives:

I feel that limiting or eliminating stock options for employees of American companies, which would be the obvious result of recent FASB plans to require their expensing on financial reports, would be bad for both American business and for American workers.

Stock option plans are a good way for companies to attract employees who want their compensation based, at least in part, upon their results in the “real world” and not as dictated by bureaucracy or unions.

I am a mid-level employee at my small company and would suffer financially if I stopped receiving stock options. I am not “rich” and I’m not a CEO or a vice president. I am a simple worker trying to get things done and provide for my family.

I understand the concerns about abuse by some individuals or some companies regarding stock option plans, and I do agree that something needs to be done. But I believe the answer is better oversight and harsher penalties for wrong-doers, not across-the-board punishment for the transgressions of a few bad apples. Those individuals who currently abuse the stock option plans will simply find another avenue to use, while the millions of American workers who benefit properly will be shut out.

The plan to require the expensing of stock options seems to be a lose-lose proposition. I support H.R. 3574 and S. 1890 which would limit the FASB’s plan and require further study of the economic impact of the plan BEFORE it is implemented.

I removed the bit about “as dictated by bureaucracy or unions” from the messages to my representative who are Democrats. Why needlessly make condescending-sounding remarks about their primary support base?

I realize that, as a beneficiary of stock options, this position sounds self-serving. You’re damn right it is.

I also believe that this is the better route for America and for our workers. As far as I’m concerned, there should be MORE performance-based compensation, not less. It’s when we are uninterested in the “bigger” picture that we lose touch with what’s going on.

By making the company’s performance important to every worker, every worker has a vested interest in doing his or her best. For themselves, as always, but also for the “greater good” of the company itself, since that will also translate into a personal benefit. Americans can be quite powerful individually, and when a number of individuals work together, we can be quite unstoppable. This is also true for all other people in the world, of course, but America has a long history of placing the individual higher in the pecking order than most other places.

The FASB plan will hamper the financial success of many businesses (especially smaller ones) and many, many individual workers (and their families). It will close one route for those with “road rage”, but they already have an innate ability, due to their wealth and their position, to move on to another route. The rest of us will be stuck in the driveway. This would actually increase the “gap” rather than close it.