Financial advisers who have many clients with stock options are concerned that the proposal issued last week by the Financial Accounting Standards Board may make it uneconomical for companies to continue issuing options to employees.
"How do you assess the future value when it's going to be based on appreciation of the stock, and that's obviously an unknown variable?" asked Michael Boone, president of MWBoone and Associates in Bellevue, Wash., from which he can see the offices of Microsoft Corp. about six miles away in Redmond.
Many of his clients are Microsoft employees. Microsoft has switched from granting employees stock options to giving them company stock. The company provided employees with an analysis of how they would fare based on different appreciation rates.
"At a high appreciation rate, the option was better, and at a low appreciation rate, the stock was better," Mr. Boone said.
"For people who own a stock that pays a dividend, owning the stock can be more valuable to them than owning the option, because of the dividend," he said. "But in general, you get such leverage with options that if a stock appreciates rapidly, the outright gift of the stock will not be nearly as attractive as the options had been."
Under the proposal made by the Norwalk, Conn.-based standards board, all forms of share-based payments to employees, including employee stock options, would be treated the same way as other forms of compensation by recognizing the cost in the income statement. The expense of the award would generally be measured at fair value at the date of the grant.
The proposal was immediately attacked by the high-tech industry, which has made liberal use of stock option grants to attract employees to startup companies that appreciated rapidly during the 1990s.
It "would systematically overvalue employee stock options," said a press release issued by the International Employee Stock Options Coalition in Washington. The group represents trade associations and companies in the high-tech, manufacturing and service industries.
There has been heated debate over what method would be the best way to reflect accurately the value of stock options. The standards board is relying on two accounting methods for valuing the options, Black-Scholes and binomial, despite the fact that neither was designed to calculate the value of employee stock options, according to the stock options coalition.
Rep. Richard Baker, R-La., chairman of the House Financial Services subcommittee on capital markets, said his panel will hold a hearing April 21 to evaluate the proposal.
"There is mounting evidence of the terrible impact this rule would have on our economy at the very time we are fighting through a jobless recovery," he said in a press release.