[Congressional Record Volume 143, Number 150 (Friday, October 31, 1997)]
[Extensions of Remarks]
[Page E2151]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E2151]]

INTRODUCTION OF LEGISLATION TO PROVIDE TAX-ADVANTAGED STOCK OPTIONS TO 
                    NON-HIGHLY COMPENSATED EMPLOYEES

                                 ______
                                 

                           HON. AMO HOUGHTON

                              of new york

                    in the house of representatives

                        Friday, October 31, 1997

  Mr. HOUGHTON. Mr. Speaker, today I am introducing the Employee Stock 
Option Act of 1997, a bill designed to provide tax-advantaged stock 
options for more moderately paid employees. The legislation will enable 
these employees to participate meaningfully in their company's success.


                               BACKGROUND

  There is a growing concern about the wage gap. The perception is that 
there is a widening in the gap between the compensation of executives 
who are given stock options and regular employees. Much of executive 
compensation is made in the form of stock options. They have been 
profitable because of a rising stock market. Furthermore, many 
executives have earned substantial awards during a period of poor 
performance or and at times when others were being laid off.
  How can we address this wage gap issue without imposing Government 
mandates, etc. at the upper end? There is presently a $1 million limit 
on the tax deductibility of nonperformance based executive compensation 
for a publicly-traded corporation. The limit can be exceeded if 
compensation is based on performance goals or stock options tied to the 
market, therefore this limit has not slowed the increase in total 
compensation of executives during the past few years.
  This Employee Stock Option Act of 1997 takes a different approach. 
Rather than putting a lid on the top, it gives a lift to the bottom. 
This legislation will benefit employees, whose hard work has enhanced 
the companies overall performance. In other words, employees through a 
broad-based stock option program ought to be able to build their wealth 
beyond what they would ordinarily receive from a salary. Furthermore, 
this act would give employees with limited disposable income the luxury 
of cashing in the option to pay education cost, putting a down payment 
on a home, or maintaining savings for the future.


                                PROPOSAL

  Provides a special stock option provision for employee stock options 
[ESO's], if companies offered at least 50 percent of the total options 
under the special stock option provision in a given year to non-highly 
compensated employees [NHCE's].
  The idea is to provide a simple stock option approach for all 
employees. Such an option could be easily converted into cash, with 
minimum taxes, and would therefore put funds immediately in the 
employees' pockets. Of course, it is recognized that some holding 
period of the option or stock is appropriate for consistent tax policy.
  This proposal would encourage employee participation in the growth of 
the enterprise and provide a tangible benefit through an increase in 
the stock price.


                                DETAILS

  A new subsection (e) would be added to Internal Revenue Code section 
422. The new subsection would provide that highly compensated employees 
could be awarded stock options, up to a new dollar limitation of 
$200,000, if half or more of the options granted in a particular year 
go to non-highly compensated employees, [NHCE's]. Under current law, 
section 422(d) mandates a dollar limitation of $100,000. It is believed 
that raising the cap for these special options will encourage 
corporations to grant more options to lower level employees as further 
explained below.
  NHCE's comprise those employees who are not defined in section 414(q) 
as a ``highly compensated employee'', the latter being an employee who 
generally earns $80,000 or more, adjusted annually for cost-of-living 
changes. Amount increased under H.R. 3448.
  If the employee either holds the subsection (e) option for 2 years or 
holds the stock for at least a 1-year period, then no income would be 
recognized by the employee upon grant or exercise of the option. Upon 
sale, any gain would be treated as a long-term capital gain and could 
be eligible for the new reduced capital gain rate of 20 percent if the 
employee holds the stock longer than 18 months, otherwise it would be 
subject to the current maximum rate of 28 percent or treated as 
ordinary income if that resulted in a lesser tax. The present law 
requires a holding period of at least 2 years from date of grant and 1 
year for the stock, so it is necessary to add a provision to cover the 
subsection (e) options as the option could be exercised after 2 years 
and the stock immediately sold.
  In addition, the excess of the fair market value at exercise of the 
subsection (e) option shares over the option price, would not be 
subject to the alternative minimum tax [AMT], as under current law. 
This exception would only apply to the new subsection (e) options. 
Although the current AMT on incentive stock options normally might not 
apply to individual NHCE's because of the annual exemption, this 
exception would eliminate the burden of complexity and recordkeeping 
requirements related to such calculations. This change would also 
encourage corporations to make greater use of the stock options for 
employees and executives.
  If the employer offers subsection (e) options to employees who 
qualify as NHCE employees, and such options represent at least 50 
percent of the total subsection (e) options granted to all employees in 
a given year, then highly compensated paid employees could receive the 
identical tax benefit as the NHCE's. This test would be applied on a 
yearly basis. The combination of first, a shorter minimum holding 
period of 1 year, second, elimination of the AMT, and third, raising 
the annual cap, all applicable only to subsection (e) stock options, 
should be a powerful incentive for corporations to offer these options 
to regular employees in order to be able to offer them to executives.
  It is anticipated that a cashless exercise system would be used for 
exercising such the NHCE options. This is not unlike the system widely 
used today.
  The current rules regarding corporate deductibility and disqualifying 
dispositions would apply, except for changes in the holding period. For 
example, if the employee exercises the option, and disposes of the 
stock in 9 months from date of grant, then the employee has ordinary 
income as compensation, and the employer is entitled to a deduction for 
the same amount. However, in cases where the option is held for 2 years 
or more before exercise or holds the stock 1 year or longer after 
exercise, then the gain at exercise is not deductible by the employer.
  Other provisions applicable to the current incentive stock option 
plans, and identical to those in section 422(b), would also apply to 
subsection (e) stock options. Generally the provisions are:
  An option plan approved by the shareholders is required.
  Option price no less than the fair market value at date of grant.
  Option granted with 10 years from the date plan is adopted.
  Option period no longer than the shorter of 10 years or 1 year after 
termination of employment.
  Option not transferable except at death, etc.
  Grantee does not own stock possessing more than 10 percent of the 
voting power.
  In addition, non-employee directors, independent contractors, and 
consultants would be ineligible to receive subsection (e) stock 
options.
  It is not the intention of this proposal to change the provisions 
relating to incentive stock options under section 422, other than 
adding a new special option under section 422 (e), or employee stock 
options under section 423.
  The proposal is not limited to publicly-traded companies, although 
that is where the wage gap issue has been highlighted because of the 
compensation information available to the public. Private companies 
should be able to participate as well.
  I urge my colleagues to join me in support of this legislation.

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