Leave Stock Options Alone

Leave Stock Options Alone

Expensing Stock Options is Wrong Answer to Enron Collapse
June 18, 2002

Washington, D.C., June 18, 2002—As pressure grows on companies in the wake of the Enron collapse to treat stock options to employees as compensation expenses for accounting purposes, a new study by the Competitive Enterprise Institute shows why such a move is a bad idea.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

 

“The use of stock options has exploded over the last decade, at the same time intangible intellectual property has become a more important component of corporate value,” says CEI Senior Fellow James V. DeLong, author of The Stock Options Controversy and the New Economy

 

“Proposals to expense options ignore the rising importance of intellectual property in determining a corporation’s value,” explains DeLong, “and they ignore the role of options in helping to level the playing field between venture capitalists and the ‘experts’ who need financial backing to start a company, especially in high-tech industries.”  If the technology works, DeLong says, then the experts reap a big financial reward through their stock options.  “Obviously, an expert who believes his own pitch will find such a deal attractive; a snake oil salesman will not.”

 

The Senate Finance Committee recently held hearings on a bill (S. 1940) that would not only force companies to treat stock options as expenses for accounting purposes, but would also reduce the tax deduction allowed when an employee exercises his options.  Prominent businessmen and economists, including Alan Greenspan and Warren Buffett, have also joined in the post-Enron “do something” call for action. 

 

“It’s apparent that pressure to change accounting for stock options is motivated by political rather than accounting concerns.  Those exerting it are well aware that the proposed changes would discourage the use of broad grants of stock options, and this is the result they wish to achieve,” says DeLong.  “These proposals would meddle destructively in a complex financial and entrepreneurial ecosystem.”

 

Mr. DeLong’s study can be viewed online, or a hard copy can be obtained through CEI’s publications department at 202.331.1010, ext. 210.

CEI is a non-profit, non-partisan public policy group dedicated to the principles of free enterprise and limited government.  For more information about CEI, please visit our website at www.cei.org.