Congress Probes Taxes and Accounting for Stock Options

On April 18, 2002, the Senate Finance Committee heard testimony on the tax and accounting treatment of executive stock option compensation. Chairman Max Baucus said the objective of the hearing was to fully explore the issues that surfaced in the wake of Enron, even though some may fall under the jurisdiction of other committees.

A key issue is whether the treatment of stock options is best handled as an accounting question or through the tax code. Senator Carl Levin argued that Congress has the responsibility for adopting a tax code. "We cannot duck it by saying it's an accounting problem," Senator Levin said. He and Senator John McCain have co-sponsored proposed legislation (S. 1940) to link tax benefits from stock option compensation to a requirement that the company include such expenses on its financial statements. His testimony cited examples of some of the problems associated with stock options that have surfaced in recent months.

Over just the last few months, too many articles to count have described companies where CEO stock option pay has soared despite poor company performance. Global Crossing went bankrupt while its CEO walked away with $730 million in a single year. Oracle Computer stock price dropped 57% in the same year its CEO cashed in stock options for $700 million. Cisco Systems stock price dropped 72% in the same year the company gave its CEO 6 million new options. Other companies repriced options that had lost their value after the stock price dropped, or issued additional options so that executives would benefit even when company stockholders lost.

Proponents of the Levin/McCain bill included Sarah Teslik, executive director of the Council of International Investors, who said executive stock option compensation has become a critical tool that enables corporate fraud. Opponents included John Biggs, CEO of TIAA-CREF and former member of the Public Oversight Board, who said he agrees all types of employee stock options should be expensed in income statements, but he does not think Congress should direct accounting standards through the tax code.

Read the testimony of Ms. Teslik, Mr. Biggs and others at the Senate Finance Committee hearing. Download S. 1940, "Ending the Double Standard for Stock Options Act."”

-Rosemary Schlank

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