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The Employee Ownership Update

Corey Rosen

June 18, 2002

(Corey Rosen)

Senate Banking Committee Agrees on Accounting Reforms; Stock Options Expensing Appears Dead

The Senate Banking Committee, by a 17-4 vote, has agreed on a compromise version of broad reforms of the accounting profession. The agreement focuses on setting boundaries on accounting firms providing consulting services and on establishing standards for the oversight of accounting procedures. Notably dropped from the compromise was a proposal that was part of a bill introduced by Banking Committee chair Paul Sarbanes, D-MD (the "Public Company Accounting Reform and Investor Protection Act") that would direct the SEC to study the impact of accounting rules on stock options. Advocates for stock options feared the proposal would build momentum for requirements that companies expense stock options on their income statement. Evan Bayh, D-IN, led the effort to drop the accounting proposal. It would seem very likely that if Senate Democrats cannot agree even to study the idea, broader proposals, such as the Levin-McCain bill (the "Ending Double Standards for Stock Options Act") to prohibit companies from taking tax deductions for options they have not expenses, have virtually no chance of passage any time soon, if at all.

Broad-Based Stock Options Retain Popularity Despite Market Ills, Enron

It's become commonplace for observers to predict that the rage for broad-based stock option plans that started in the 1990s will yield to pressure from the declining stock market and the general unease over employee ownership caused by the Enron fallout. A new study by Segal Sibson Consulting and WorldatWork, however, suggests that this has not happened. Based on response from 300 companies, there has been no change in the percentage of employees eligible for options across all levels of job categories from part-time staff to executives. In 2000, 28% of part-time employees were eligible for options, while 28% were eligible in 2002; 39% of administrative staff were eligible in 2000, compared to 37% in 2002,; and 58% of technical staff were eligible in 2000, compared to 67% in 2002. None of the differences is outside the realm of random survey variation. While just being eligible for an option does not mean an employee will receive an option, the fact that eligibility remains unchanged is a good indicator that actual receipt of options has not changed much either.

Not surprisingly, technology companies made more employees eligible (50%) than any other sector, followed by general industry (just over 30%) and banking/finance (30%). These percentages do not suggest the average company made 50% or 30% eligible; rather they mean that some companies made most employees eligible, some made a significant minority eligible, and many limited options to executives.

The award of options is somewhat more based on performance than in the past. Sixty-seven percent of respondents said performance played an important role in options awards, and 33% said performance played a more important role than in the past. Few respondents, however, indicated that the decline in the market affected their options policies, just as almost none said Enron did. A somewhat larger number; 22% of the respondents, however, said concerns about potential accounting changes had led them to change options policies. The study's final results will be available in July.

United Pilots, Non-Union Employees to Get Stock Options

United Arilines's pilots and non-union employees will be getting stock options in return for wage concessions to help keep the company afloat. United is still trying to negotiate with mechanics and flight attendants, but both unions have been much more resistant on the issue.

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