Congress has options on options

Heads we win; tails you lose.

That's the situation for investors who own shares of corporations that give executives lush stock-option grants, critics say.

If the stock goes up, top executives stand to get rich when they convert their options to stock and sell it. Moreover, the company gets a tax break.

Enron, for example, reduced its income-tax liability by claiming deductions on nearly $600 million in options payouts from 1996 to 2000.

But the investor loses. He sees his ownership in the company diluted by the new shares.

"It's a shell game," charges Graef Crystal, a veteran expert on executive compensation.

Some lawmakers want to require corporations to list options as an expense against revenues in their regular earnings statements, as they already do for salaries, bonuses, and some other compensation. But Mr. Crystal doesn't want that. He'd rather have firms make the change voluntarily.

The options issue is relevant to debate last week in the Senate over a massive accounting reform bill by Banking Committee chairman Paul Sarbanes (D) of Maryland. Sen. Carl Levin (D) of Michigan considered introducing an amendment requiring any firm that treated options as an expense for tax purposes do the same in financial statements. But an options-expensing amendment of Sen. John McCain of Arizona was clobbered by parliamentary maneuvers Thursday.

So Mr. Levin proposed that the Financial Accounting Standards Board (FASB) – the body which sets accounting rules – review within a year the options issue. It is expected to come up today.

Whether public disgust with corporate corruption eventually forces Congress to act on options remains unknown. The relatively tough Sarbanes bill could be diluted in conference with the House, which has passed a less ambitious accounting reform bill.

Opposition from Silicon Valley corporate executives, famed for making political donations, especially to Democrats, has so far blocked legislative action.

"These guys still have a lot of clout," says Crystal.

TechNet, a high-tech trade group, sent a group of its CEOs to talk to members of Congress. "An expense approach would be misleading to investors," the group contends. "Because options cannot be measured accurately, an expense will lead, by definition, to inaccurate financial statements." And it amounts to "a corporate tax increase" and will "severely limit the ability of companies to recruit and retain talented employees."

In the mid-1990s, high-tech firms succeeded in getting Congress to kill an effort by the FASB to require options expensing. Sen. Joseph Lieberman (D) of Connecticut helped clobber the plan. The FASB did, though, insist that companies put a footnote in their more obscure but comprehensive 10-K forms telling what earnings would be if options were included as an expense.

Crystal tells of one company, Sable Systems International in Henderson, Nev., which declared 50 cents per share profit in its 2001 annual report and a $1.02 loss in its 10-K report footnote, taking account of options.

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