Stock options help level capitalism's playing field. They give providers of human capital — the everyday working men and women who help companies grow — a chance to participate in the benefits of stock growth, a benefit historically reserved for providers of financial capital.

Planned accounting rule changes, however, threaten that benefit.

Accountants want companies to say that issuing employee stock options costs the companies money, even though the companies pay no cash, and in fact receive cash when employees exercise options.

The accountants want a consistent theory: if an employee gets a benefit, the company has an expense, cash or no cash

The accountants are consistent but they are wrong. Their approach would hurt growing companies, employees and, the economy.

Options help small firms compete : Recently, regional entrepreneurs went to Washington, D.C., to talk about their concerns and express their support for the pending Baker-Eshoo (HR 3574) Stock Option Accounting Reform Act. Under the reform act, Congress would tell the accounting standards-setters that options cannot be considered an expense, except in the case of senior company executives.

While stock option accounting may sound to the layperson like a metaphysical question, it has real-world impact. How companies account for options will affect whether companies maintain broad-based option plans for employees, if options are treated as an expense, companies will want to limit options, like any other expense.

If employees don't get options, their only chance to participate in the growth of their companies is to save from their weekly paychecks and buy shares in the open market in competition with, say, Warren Buffett (who controls vast financial capital).

Growing companies also benefit from options by reducing salary costs and using their cash to grow and compete with larger, well-established companies.

In the late 1990s, California in particular experienced the favorable economic impacts, at the individual and state tax-generating levels, that stock options create when companies are growing in a healthy economy.

Individuals whose companies grew in value shared in that growth. When they exercised their stock options, they bought houses and college education for their children. They also paid taxes on the gains, which benefited the state and federal governments.

Compromise on senior execs : Not everyone understands how employee stock options work, which hinders the public debate. Very simply, an option means an employee can buy a share of stock from the company at a fixed price in the future.

If share prices decline, the employee buys no shares. If share prices rise, the employee profits on the difference between the fixed purchase price and the higher market price, by buying stock from the company and selling to the public market.

The reform act's compromise reporting options to senior executives as corporate expenses — balances limiting options to executives (to prevent Enron-style abuses) while preserving the value of option awards to employees in general, particularly in technology companies whose innovations generate the real growth in the American economy.

The local innovators who went to Washington need       stock options to recruit and retain employees they might not otherwise be able to pay in cash. The companies and their employees are united in seeking success that will raise the value of their stock.

With the help of the reform act, their success can be our region's success.

 

Bruce Dravis is a partner in Downey Brand Attorneys LLP of Sacramento; Nancy Frank is executive director of the Sacramento council of AeA, a technology trade group; and Roger Akers is chairman of the Sacramento Area Regional Technology Alliance.