Sunday, April 21, 2002

Stock options proposal misguided

By Rhonda Abrams
Gannett News Service

        Alan Greenspan's wrong! Why is it that when the big guys mess up, it's the little guys who suffer? Often, the unintended consequences of well-meaning reform harm the wrong people. Today's example: proposed changes in accounting rules for stock options. Intended beneficiaries: small stockholders. Unintended victims: innovative entrepreneurs.

        Stock options make it possible for new companies to attract top-rate employees. Young companies are always strapped for cash. They can't offer the same salaries, benefits, or other perks as large companies.

        “If you go to work for a startup company, you're taking a lot of risks,” said Corey Rosen, executive director of the National Center for Employee Ownership in Oakland, Calif. “You need compensation for that risk.”

How they work

               Stock options work like this: A company grants someone the right — an option — to buy that company's stock at a set price some time in the future. If the stock grows in value, the employee exercises the option, buys the stock at the set lower price, and profits from the difference. In early-stage companies, the set stock price may be a dollar or less. If the company grows, the stock goes public, and the value increases, the employee makes money. That's why you hear about all those Microsoft millionaires.

        Giving options to all employees — not just top management — turns out to be good for business. Studies, including one by Rutgers University, show that companies with employee ownership survive longer, are more productive and have higher profits than those that don't.

Enron fallout

               But the Enron accounting fiasco, where the guys at the top made millions on stock options, has made some people nervous. To protect small shareholders, well-intentioned legislation proposed by Sens. John McCain, R-Ariz., and Carl Levin, D-Mich., would require companies to treat stock options as an expense on their books — even though no cash was actually spent. Such changes are strongly supported by Mr. Greenspan, chairman of the Federal Reserve.

        Ah, but here's where the unintended consequences arrive. Those proposed accounting rules would discourage — and punish — companies that give stock options to a large number of employees.

        “The unfortunate thing (about this legislation) is that fewer companies would issue options to most of their employees,” said Rosen. “It's inconceivable that they would stop obscene-size grants of options to their executives. They would bite the bullet and say, 'We've got to do it (for executives), but the options we give to all those other folks we can do without.' “

        So don't think of stock options as something only for Wall Street to worry about. They're a vital tool for small companies that aim to grow big — whether to attract employees or to get funding. Sens. Levin and McCain have their hearts in the right place, but the business they hurt may be your own.

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