Addicted to Options

According to a report in the well-respected San Jose Mercury News (well, we like it), tech salaries decreased in 2002. In fact, the Mercury News reports that the highest-paid executives at Silicon Valley's largest companies took home $1 billion last year.

While that may seem like a nice tidy sum, keep in mind the total (which included salary, bonus and estimated stock options gains for 754 executives), was only about one-fifth of the record $4.7 billion tech executives made in 2000.

Thomas Siebel, CEO at Siebel Systems, topped the survey with total 2002 income of $34.6 million. Much of Siebel's haul came from exercising stock options. Same thing for the number two on the list, Scott McNealy of Sun Microsystems (who made nearly $26 million last year after cashing in $25 million in options.) Craig Barrett, CEO of Intel, came in third with a little over $19 million in compensation in 2002.

It remains unclear what would have happened to the income of the employers of those three chief executives if the companies had been required to expense those stock option at the time of the grants.

What does seem clear: the continued harping of CEOs at established IT companies about how stock options expensing would do serious damage to the tech sector is a bunch of hooey. Expensing of employee stock options will cause some strain, no doubt. According to a recent survey by the Associated Press, the expensing of stock options would have reduced earnings at the top 35 U.S. technology companies by $9.8 billion last year. That works out to roughly $250 million per company.

That's a hit, true. Moreover, the expensing of stock options would be a shock to the system for the tech sector. In Silicon Valley, stock options are a way of life (some would say addiction). And the granting of stock options to employees is about the only way tech startups -- emphasize startups -- can attract and retain top workers. Indeed, without stock option grants, managers at fledgling IT businesses would be hard pressed to compete for tech talent with more established companies. Really, what would their pitch be? "We won't pay you much, but you'll work long hours."

But mature, cash-flush tech companies like Siebel and Intel would seem to have the financial wherewithall to pay big bucks to attract and retain employees. And by expensing employee stock options, their financial statements would be a much truer indicator of the health of their businesses. That's not just us saying that either. Alan Greenspan, Warren Buffet, and Robert Herz have all reportedly come down on the side of expensing worker stock option grants.

But for now, generous granters of stock options continue to dine at the trough: they give away something of value (stock options), yet they don't treat that giving-away as an expense. Strange stuff, considering that CFOs who receive stock options almost always think of the grants as compensation. But when it comes to the accounting treatment of those grants... well... all of sudden they're handled as something other than compensation.

Backers of that practice -- and consultants who make money off backers of the practice -- say stock option grants help align the interests of workers with shareholders. That, they claim, improves corporate performance.

Maybe. But consider this: most technology companies have handed out massive amounts of stock options to workers over the past few years. Those companies have not exactly been lighting up the tote board of late.

And despite propaganda to the contrary, the majority of workers do care about their jobs, do put in long hours, and do good work -- and would do so with or without stock options. As for indifferent employees: stock option grants aren't real likely to convince them to ratchet it up another level.

The real question now is will anybody put an end to the stock option free lunch?

It's not looking real likely. FASB does appear to be leaning toward requring all companies (with the exception of non-public startups) to expense employee stock options. But a new bill in Congress sponsored by -- surprise, surprise -- two California lawmakers would place a three-year moratorium on any revision of the current GAAP method for stock option accounting (see Congress, FASB in Stock Option Flap.").

While tech executives in Silicon Valley must be thrilled with HR 1372, rule-makers at FASB are probably less enthused. If the proposed legislation passes -- and it's got a shot -- FASB's recent initiative to get companies to expense stock options would be derailed.

It wouldn't be the first time. About ten years ago, the standards-setting board got very close to requiring companies to expense stock option grants. As you may recall, industry forces managed to scuttle the idea -- mostly by getting Congress to threaten to dismantle FASB if it went through with its plan.

Of course, if FASB had managed to get its program through ten years ago, tech companies wouldn't find themselves in the jam they're in now. We're just saying.

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