SHOW: CNBC's Business Center
Wednesday, July 10, 2002
HEADLINE: Employee stock options under fire from investors and regulators
BYLINE: Ron Insana, Jerry Cobb
BODY:
RON INSANA, co-anchor: Well, employee stock options made a lot of people rich in the last bull market, but now they are under fire from investors and regulators, who complain that companies handing them out aren't accounting for their true cost. More now from CNBC's Jerry Cobb.
JERRY COBB reporting:
Stock options grant workers the right to purchase shares of company stock at a fixed price within a specific period of time. The more the stock price rises, the more valuable the options, which is what makes them a powerful employee incentive, one which many companies have been only too happy to dole out.
Ms. DIANE DOUBLEDAY (Mercer Human Resource Consulting): Right now, options don't cost companies money, and that's why, in part, they have become such a prevalent practice. It's not cash out the door, and it has no impact on earnings. The expense of offering an option is just not reported in earnings currently, except in a footnote.
COBB: An estimated 10 million American workers receive some form of stock options as part of their compensation. Yet only two companies in the S&P 500 include the cost of these options in their earnings statements: aerospace and defense giant Boeing and food and drug retailer Winn-Dixie Stores. Recent accounting scandals have increased pressure on publicly traded firms to include their option expenses in their earnings, but only one has actually done so, San Francisco real estate investment trust AMB Property.
Mr. HAMID MOGHADAM (AMB Property Chairman & CEO): Philosophically, I always felt, and the rest of the senior management team and the board felt, that options were compensation and they should be deducted.
COBB: AMB Properties says issuing stock options will cost the company $900,000 in profits this year or a penny per share. But most companies are reluctant to expense their stock options and for good reason. For example, if Intel included the expense of its employees' stock options, the chipmaker's 2001 profit of $1.3 billion would shrink to a gain of just $254 million. Similarly, Yahoo!'s reported loss of $93 million would balloon to $983 million with option costs thrown in. And instead of a $255 million profit for 2001, software giant Siebel Systems would have posted a $467 million loss. With numbers like these, it's no wonder the idea of expensing stock options is anathema in places like Silicon Valley.
Mr. T.J. RODGERS (Cypress Semiconductor): Expensing stock options means you have to pay for them twice. You have to pay for them with dilution when you give them out, then you have to pay a second time by writing them off as if they were a loss.
COBB: Strong opposition from the tech sector could derail efforts to require companies to expense their options, but growing pressure from investors and regulators may convince some firms to follow AMB Property's example.
Mr. JIM DELONG (Competitive Enterprise Institute): You know, the FASB thought of doing this a few years ago and was pushed back, but the SEC might require it; Standard & Poor's is sort of thinking about it. So I think it's a battle that's going to continue.
COBB: Now Fed Chairman Alan Greenspan and investment guru Warren Buffett are among the voices urging companies to start expensing their options. Rating agency Standard & Poor's has also weighed in saying it will include the cost of stock options when calculating what it calls a company's core earnings. And, Ron and Sue, there's a move afoot in Europe to set an international standard for accounting for stock options, one which US companies may eventually have to conform to. Back to you.
SUE HERERA (Co-anchor): Thanks a lot, Jerry. Jerry Cobb in Los Angeles.
Still to come on BUSINESS CENTER, corporate scandals and lukewarm earnings, all part of the bad news weighing on investors. But with all this negativity, is there anything that is working in this market? Yes, there is. We will tell you what they are in just a moment when BUSINESS CENTER returns.
