The Employee Ownership Update
June 15, 2004
Bill Limiting Options Accounting Passes House CommitteeOn June 15, 2004, the House Financial Services Committee passed H.H. 3574, "The Stock Options Accounting Reform Act," by a vote of 45-13. The bill would limit stock options expensing to the top five executives of a company, require an economic impact study before the new rules become effective, and exempt small business from the requirement. Specifically, the bill would amend the Securities and Exchange Act of 1934 by adding a new Section 13(m) with the following provisions:
Passage in the full House seems very possible, but the Senate looks very doubtful.
- Publicly traded companies would have to report an income statement expense for options granted to the top five executives using a fair value standard based on a formula such as Black-Scholes or a binomial model.
- When options are actually exercised, companies would be required to "true up" the difference between the cost they initially estimated for the options and the actual spread on the options.
- Volatility will automatically be set to zero for all accounting models.
- Non-public companies with (both) less than $25 in revenue and $25 million in common stock value held by non-affiliates are exempted from the requirement, and, if they go public, will not be subject to its requirements for three years after an IPO.
- No accounting rules on options can go into effect until a one-year study is done by the Department of Labor and Department of Commerce.
- A fuller and plainer disclosure of options is required, including the number of options granted, the weighted average exercise price, an estimate of how many options will vest, and an expanded discussion of dilution.
American Benefits Council Urges 50% Expansion in Broad-Based OwnershipThe American Benefits Council (ABC), an employee benefits organization primarily for larger employers, has set as a policy goal that by 2014 there will be "a 50% increase in the number of employees who receive stock in broad-based stock options plans, stock purchase plans, and employee restricted stock." The Council urged that accounting rules not be changed in a way that would make it less appealing for employers to adopt these plans and that tax policy should not require employees to pay tax on stock they acquire though a stock-based program until they receive cash from its sale. The gains should also be exempt from the Alternative Minimum Tax, and disqualifying dispositions on ESPPs and incentive options should not trigger payroll taxes. The Council would oppose rules, however, that would mandate how employers would add new restrictions on eligibility and allocation rules for the plans.
The recommendations are included in the Council's June 2004 report, "Safe and Sound: A Ten-Year Plan for Promoting Personal Financial Security."
Employee Retirement Accounts Still Have a Lot of Employer StockA new study from Hewitt Associates shows that employees and employers have not moved away from employer stock in retirement accounts, despite the experiences of Enron, WorldCom, and others in recent years. The study, based on 2.5 million employee accounts, shows that employees holding company stock have an average of 41% of their investment in company shares, and more than 25% of participants had over half their assets in employer stock. Thirty percent of those over 60 had more than 50% in employer stock. The numbers are essentially unchanged form recent years. This could be attributable in part to the importance of employer matches in 401(k) plans as well as employee investment choices.
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