Human Capital & Careers

Expense Options, Says Conference Board

Blue-ribbon commission releases first report on compensation; says employee stock options should be treated as expenses. Volcker, Grove choose to d...
Lisa YoonSeptember 18, 2002

As noted by CFO.com on Tuesday, a special panel of the influential business-policy group The Conference Board yesterday released a report on executive compensation at public companies. The Conference Board tome is yet another in a string of reports put out lately by various interest groups to reform corporate pay practices.

In the first of a three-part series, the panel examined the circumstances that led to the string of recent corporate scandals “and the subsequent decline of confidence in American capital markets.” In the initial report, the Board’s blue-ribbon Commission on Public Trust and Private Enterprise proposed a slew of reforms intended to stave off corruption and abuse in executive compensation practices.

The big findings of the panel: corporate compensation committees need to do a better job, and — drum roll, please — employee options should be treated as expenses.

Specifically, the panel recommends that compensation committees play a more active role in policing executive compensation processes. How? By retaining and directing compensation experts — not leaving the task to management. The commission also suggests that compensation committee members should determine executive compensation levels based on their own judgment — independent of industry statistics or by a company’s own compensation precedents.

The report noted that, in certain cases, those precedents “have been excessive.”

The commission went on to propose that a compensation committee chair “take ownership” of that committee’s activities by being present at shareholder meetings to answer questions directly on executive compensation.

The commission also came down on the side of uniformly expensing stock options. In doing so, the panel called upon the Financial Accounting Standards Board and the International Accounting Standards Board to “move expeditiously” to set standards for accounting treatment of options.

In addition, the commission noted that top corporate executives should be required to hold “a meaningful amount of company stock on a long-term basis” with specific “substantial minimum holding periods.” Executives should be required to give advance notice of any company stock sales, the commission asserted.

The 12-person commission includes former Federal Reserve Board chief Paul Volcker, former Securities and Exchange commission chairman Arthur Levitt, and Intel Corp. Chairman Andrew Grove.

Interestingly, Volcker and Grove offered dissenting opinions on the commission’s two big recommendations. Volcker stated his preference for phasing out the use of options altogether, saying “[t]here are far better alternatives for… achieving appropriate alignment of shareholder and management interests.”

Intel chairman Grove disagreed with the recommendation to expense options, noting that the commission did not consider reasonable alternatives to accounting for options.

“The issue of accounting treatment of stock options has become and economic Rorschach test onto which people project their basic beliefs about American enterprise,” Grove argued. “Unfortunately, this does not encourage a rational discussion of accounting issues.”

Noting that the commission’s members includes only one accountant, the Intel boss went on to pretty much slam the first report. “[O]ur message to the public is that accounting can be whatever a few elite people want it to be,” he wrote. “How does that restore public confidence?”