Stock Options
Issue:
The competitiveness of the U.S. high tech sector in general - and the semiconductor industry in particular - rests on our ability to attract and retain the most highly skilled engineers in the world. Today there is fierce international competition for this talent. Stock options - which allow companies to share the risks and rewards of ownership with employees - are a key part of this competition. The Financial Accounting Standards Board (FASB) has proposed a standard that will require the expensing of employee stock options, and the staff of the Securities and Exchange Commission (SEC) have issued a Staff Accounting Bulletin (SAB) to implement this rule. The SAB leaves very serious questions unanswered. SIA members believe that providing the investing public with transparent, accurate and comparable information is of paramount importance and any changes to accounting rules must bolster this goal - we do not believe that expensing options would lead to more accurate or transparent financial statements both because options do not represent an expense to the company, but also because of the inability of current models to reliably and correctly value employee stock options. Expensing would also negatively impact the ability of companies to offer Employee Stock Purchase Plans (ESPPs). SEC Commissioners must delay this standard until there is adequate time to address the serious questions that remain unanswered.
Importance:
U.S. high technology companies must be able to offer competitive compensation packages to a broad range of employees in order to compete domestically and internationally in the race for talent. The granting of stock options has been a key factor in attracting and retaining talent at all levels, and they have been a key factor driving innovation because they allow companies to share both the risks and the rewards of ownership with employees. SIA has surveyed our membership and has found that over 80% of options - and in some cases upwards of 95% - are granted to rank and file employees. Competitors in China and Taiwan, for example, will not necessarily adopt the same restrictions that will be mandated in the U.S. - in fact, the Chinese government is seeking to increase the use of stock options as a means to encourage innovation and high tech enterprise in China. Employee stock purchase plans, which are open to all employees, provide a means to encourage broad based employee ownership of employer stock - these plans are typically open to 100% of the workforce, even part time and other employees who might not receive options. ESPPs already require shareholder approval.
SIA Position/Action:
FASB took well over a year to draft its expensing rule, the SEC took three months to translate that rule into a Staff Accounting Bulletin - and yet these regulators are requiring industry to implement these significant accounting changes in just over 10 weeks time. The SAB notes that there is no single valuation methodology, and that 'best practices' in this area have yet to be developed. In addition, regulators acknowledge that the software programs and human expertise necessary to calculate this considerable expense do not yet exist. In light of these significant challenges, SIA believes that a minimum six month delay (beyond the proposed June 15 implementation date) is vital to ensure that this standard is done right. Expensing employee stock option plans will have a disproportionate impact on those firms that choose to extend stock options to a broad section of their employees, while imposing less of a burden on those who grant a small number of options only to executives.
A related concern for SIA members relates to CEO and CFO certifications of financial statements required by Sarbanes Oxley - it will be impossible to certify the accuracy of financial statements that include a stock option expense generated using the model proposed by FASB.
SIA's goal is to insure that the investing public has access to clear, concise and timely information regarding the practices of publicly traded firms, while also serving the best interests of both our member companies and their employees.
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