[Congressional Record Volume 148, Number 13 (Wednesday, February 13, 2002)]
[Senate]
[Pages S735-S741]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN (for himself, Mr. McCain, Mr. Fitzgerald, Mr. 
        Durbin, and Mr. Dayton):
  S. 1940. A bill to amend the Internal Revenue Code of 1986 to provide 
that corporate tax benefits from stock option compensation expenses are 
allowed only to the extent such expenses are included in a 
corporation's financial statements; to the Committee on Finance.
  Mr. LEVIN. Mr. President, today I am pleased to introduce Ending the 
Double Standard for Stock Options Act along with my colleagues Senator 
McCain, Senator Fitzgerald and Senator Durbin.
  As another lesson learned from the Enron debacle, this bill addresses 
a costly and dangerous double standard that allows a company to take a 
tax deduction for stock option compensation as a business expense while 
not showing it as a business expense on its financial statement.
  Stock options were a driving force behind management decisions at 
Enron that focused on increasing Enron's stock price rather than the 
solid growth of the company.
  Stock options are opportunities given to certain employees, usually 
top executives, to purchase a company's stock at a set price for a 
specified period of time, such as 5 or 10 years. When the stock price 
increases, the potential profit to the executive rises, and the more 
stock options an executive has, the smaller the increase needed to 
realize significant gain.
  Stock options are a stealth form of compensation, because they do 
not, under current accounting rules, have to be shown as an expense on 
the corporate books. In fact they're the only form of compensation that 
doesn't have to be treated as an expense at any time. But, like other 
forms of compensation, option expenses are allowed as a tax deduction 
for a corporation. It doesn't make sense, but that's the way it is. And 
this long-standing mismatch between U.S. accounting and tax rules was 
exploited by Enron to the hilt. The result was both misleading 
financial statements and an incentive to push accounting rules to the 
limit in order to artificially raise stock prices so as to make the 
stock options more valuable.
  A New York Times article from last October 21, reports that, ``Since 
1993, studies from Wall Street to Washington have shown that pushing 
[stock option] expenses off the income statement has inflated corporate 
earnings and misled investors about profits, particularly at technology 
concerns. Options are also a titanic but stealthy transfer of wealth 
from shareholders to corporate management.''
  Let's look at how it worked at Enron. We've all heard about the many 
ways that Enron inflated its earnings and hid its debts by keeping 
various partnerships off the company books. Well, Enron did the same 
thing with stock options.
  For five years, from 1996 until the year 2000, Enron told its 
shareholders that it was rolling in revenues. One analysis by Citizens 
for Tax Justice, using Enron's public filings, reports that Enron 
claimed a total 5-year income of $1.8 billion. This figure apparently 
included, however, a number of accounting gimmicks, one of which was 
Enron's decision to relegate all stock option compensation it had 
provided to a footnote and to exclude such compensation from its total 
expenses, even though, according to the same study, the stock option 
pay over five years had reached almost $600 million. That $600 million, 
by the way, represented one-third of all the income reported by Enron 
over a 5-year period.
  Yet all $600 million was, legally, kept off-the-books, away from 
Enron's bottom line. That's because existing U.S. accounting rules 
allow U.S. companies to omit employee stock option compensation as a 
charge to earnings on their financial statements. That is a unique 
rule. Stock option compensation is the only kind of employee 
compensation that a U.S. company never has to record on its financial 
statements at any time as an expense. That means Enron could give its 
executives, directors and other employees $600 million in stock options 
and never show one penny of that pay on its books. It could dole out 
stock options like candy and never reduce by one penny its alleged 
income of $1.8 billion.

  The result was that Enron was able to provide extravagant 
compensation, without ever having to account for that extravagance on 
its bottom line where stockholders and the public might take notice.
  But Enron's misleading financial statements are not the end of the 
story. The backside of the story is that, at the same time Enron was 
touting its skyrocketing revenues and providing extravagant pay to 
insiders, it was apparently telling Uncle Sam that its expenses 
exceeded its income and its tax liability was little or nothing. The 
study by Citizens for Tax Justice, after reviewing Enron's public 
filings, has calculated that, despite claiming a 5-year revenue total 
of $1.8 billion, Enron apparently failed to pay any U.S. tax in 4 out 
of the last 5 years. How did a company with $1.8 billion in revenue 
apparently pay so little in taxes? The same study calculated that with 
a 35 percent corporate tax rate, Enron should have paid about $625 
million over five years. But, apparently, according to the study, the 
principal way Enron avoided paying these taxes was by claiming that its 
income had been wiped out by nearly $600 million in stock option 
expenses, the same $600 million that Enron chose not to put on its 
financial statements as an expense. While these numbers are based on 
public filings and not based on a review of the actual tax returns, the 
significance of Enron's actions is the same, avoiding tax liability 
through the use of stock options.
  As I noted earlier, Enron was not acting illegally here, nor were its 
actions unique. It took advantage of the tax provisions which we hope 
to change in our bill which allow a company to claim a stock option 
expense on its tax return even if the company never lists that expense 
on the company books. These tax provisions incomprehensibly and 
indefensibly allow companies to tell Uncle Sam one thing and their 
stockholders something else.
  And to add insult to injury, last year the IRS issued Revenue Ruling 
2001-1 which determined that companies whose tax liability was erased 
through stock option expenses are not subject to the corporate 
Alternative Minimum Tax. That revenue ruling means that our most 
successful publicly traded companies, if they dole out enough stock 
options to insiders, can arrange their affairs to escape paying any 
taxes. That absurd result leaves the average taxpayer feeling like a 
chump for paying his fair share when a company like Enron can use its 
success in the stock market to apparently end up tax free.
  Now you may have noticed that, in discussing Enron's tax returns, I 
have been using the words ``appears to'' and ``apparently.'' That is 
because, despite a pending request from Senators Baucus and Grassley of 
the Senate Finance Committee, Enron has yet to release its tax returns 
to either Congress or the public.
  The lack of direct access to Enron's tax returns requires Congress 
and the public to have to continue making educated guesses about 
Enron's tax conduct, without having the actual facts. It is much too 
late and much too serious for Enron to be asking everyone to play this 
guessing game. Enron is in bankruptcy; it has brought economic loss to 
individuals and financial institutions across this country; its 
management claims to have done nothing wrong, and the company professes 
to be cooperating with investigators.
  Enron should immediately release to the public the last five years of 
its tax returns. Then we'll know with certainty if Enron paid no taxes 
in 4 out of the last 5 years and why. Then we'll know with certainty if 
Enron eliminated its taxes primarily through stock option deductions, 
or whether it used other tax provisions to avoid payment of tax such as 
diverting income through offshore tax havens. The public and the 
Congress have a right to know what really happened at Enron.

  It is also important to realize that most companies treat stock 
options

[[Page S736]]

the same way Enron did. A recent USA Today article reports that out of 
the S&P 500 companies, only Boeing and Winn-Dixie currently record 
stock option expenses on both their financial statements and tax 
returns. The other 498 companies apparently do not. The article says 
that had stock option expense been recognized on their earnings 
statements, the S&P 500's revenues would have fallen by 9 percent, 
another measure of how much off-the-books stock option pay is out 
there.
  Even more troubling, and something that needs more investigation and 
attention is the claim in the article that ``half a dozen academic 
studies have concluded that companies time the release of good or bad 
news near the date that executives are issued their options, 
orchestrating a potential windfall.'' In other words, some believe that 
executives are timing the release of company information around the 
dates they are to receive their stock options, thereby artificially 
inflating the value of their options.
  The future promises more of the same. A February 3rd New York Times 
article entitled, ``Even Last Year, Option Spigot Was Wide Open,'' 
reports that companies are providing more stock options than ever to 
their executives, even in the face of poor company performance and 
diluted stockholder earnings. ``It's a great time to give options,'' 
one expert is quoted as saying. ``They're cheap because they involve no 
change to earnings, and that's important at a time when profits are 
down.''
  Ten years ago, some of us tried to end corporate stock option abuses 
by urging the Board that issues generally accepted accounting 
principles, the Financial Accounting Standards Board or FASB, to 
require stock option expenses to be shown on company books. We were not 
successful. Corporate America fought back tooth and nail. Intense 
pressure was brought to bear on FASB. Arthur Levitt told the 
Governmental Affairs Committee last month that he spent 50 percent of 
his first four months at the SEC talking to corporate executives who 
wanted to keep their stock option pay off the books. On one day during 
the height of the campaign, 100 CEOs flew into Washington to lobby 
Members of Congress on this issue. In 1994, in the midst of this 
intense lobbying, the Senate voted 88-9 to recommend against putting 
stock option pay on the books.
  Arthur Levitt testified before our committee that one of his greatest 
regrets from his days at the SEC was that he didn't work harder to get 
stock options treated as an expense on a company's financial statement. 
Several accounting firms, including Andersen and Deloitte, now support 
expensing options. They are joined by more than 80 percent of U.S. 
financial analysts, as reported in a September 2001 survey conducted by 
the leading financial research organization, the Association for 
Investment Management and Research.
  In addition, the newly re-constituted International Accounting 
Standards Board in London, the international equivalent of our FASB, 
has announced that one of its first projects will be to propose 
international standards requiring stock options to be expensed on 
company books. But in a repeat of what happened here in the United 
States, corporate lobbyists are already organizing to oppose this 
project. An Enron document uncovered by my Subcommittee casts light on 
how this battle may be fought.
  The document is an email dated February 23, 2001, from David Duncan, 
the lead auditor of Enron at Andersen, to several Andersen colleagues, 
describing Enron's reaction to a request that it consider donating 
funds to the new International Accounting Standards Board.

       Today [Enron Chief Accountant] Rick Causey called to say 
     that Paul Volker had called Ken Lay (Enron Chairman) and 
     asked Enron to make a 5 year, 100k per year commitment to 
     fund the Trust Fund of 'the FASB's International equivalent' 
     . . . . While I believe Rick is inclined to do this given 
     Enron's desire to increase their exposure and influence in 
     rulemaking broadly, he is interested in knowing whether these 
     type of commitments will add any formal or informal access to 
     this process (i.e., would these type commitments present 
     opportunities to meet with the Trustees of these groups or 
     other benefits). I think any information along this front or 
     further information on the current strategic importance of 
     supporting these groups for the good of consistent rulemaking 
     would help Enron with its decision to be supportive.

  First, let me be clear that I'm not suggesting in any way that Paul 
Volker's request of Enron for a contribution to FASB's international 
equivalent was in any way improper. It wasn't. That is exactly how 
these accounting standards boards get funded. And the response by Enron 
is not really suprising, it's something we've all known but we've never 
had written confirmation of it. Contributions to the accounting 
standards boards affect the boards' independence, and that's bad news 
for reliable accounting.
  No one was mincing any words here. Enron wanted to know whether its 
money would buy access and influence at the new accounting standards 
board, and its auditor didn't bat an eye at this inquiry but asked his 
colleagues for ``any information along this front.''
  The bill we are introducing today does not require that stock options 
be charged to earnings. That is a decision for the accounting standards 
boards to make. And many of us in Congress will be working on 
legislation to make the accounting standards board more independent and 
less vulnerable to pressures from its contributors. The legislation we 
are offering today would simply state, in essence, that companies can 
take a tax deduction or tax credit for stock option expenses only to 
the extent that the company actually recognizes the same stock option 
expenses in the company books.
  The bill does not get into the accounting side of the issue. It does 
not, for example, tell companies that they have to expense stock 
options. It does not tell them when to take a stock option expense or 
how to book that expense. It focuses solely on the income tax deduction 
and states, in essence, that any tax deduction must mirror the company 
books. If a company declares a stock option expense on its books, then 
the company can deduct the expense on its tax return. If there is no 
stock option expense on the company books, there can be no expense on 
the company tax return.
  That's tax honesty. That will end the stock option double standard.
  The stock option double standard has been a long festering problem in 
corporate America. It has been one of the driving engines of stretching 
accounting rules to increase the value of a company's stock. Enron has 
put a face on this faceless problem and shown the cost of off-the-books 
stock option pay. Like other accounting gimmicks, off-the-books stock 
option pay coupled with a large tax deduction doesn't pass the smell 
test, because we all know that ``off-the-books'' means stealth 
compensation that is harder to track and easier for insiders to abuse. 
Add to the stealth factor and the insider abuse factor, a government 
policy of giving large corporate tax deductions which can completely 
eliminate a company's tax liability, and you've set the stage for just 
the type of stock option results we saw at Enron.
  It is time to end the stock option double standard, and I urge all of 
my colleagues to support enactment of this legislation this year.
  I ask unanimous consent to print in the Record, a bill summary, a 
section-by-section analysis, and the following materials: ``Less than 
Zero Enron's Corporate Income Tax Payments, 1996-2000'' (Citizens for 
Tax Justice, January 17, 2002); Duncan email (2/23/01); ``Enron's fall 
fuels push for stock option law'' (USA Today, 2/8/02); ``Even Last 
Year, Option Spigot Was Wide Open'' (New York Times, 2/3/02); ``Stock 
Option Madness'' (Washington Post, 1/30/02); ``Enron's Way: Pay 
Packages Foster Spin, Not Results'' (New York Times, 1/27/02); and 
stock option survey results by Association for Investment Management 
Research, as posted on the AIMR website on 2/8/02.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

             [From Citizens for Tax Justice, Jan. 17, 2002]

    Less Than Zero: Enron's Corporate Income Tax Payments, 1996-2000

       A January 17, analysis of Enron's financial documents by 
     Citizens for Tax Justice finds that Enron paid no corporate 
     income taxes in four of the last five years--although the 
     company was profitable in each of those years.
       Over the five-year period from 1996 to 2000, Enron received 
     a net tax rebate of $381 million. This includes a $278 
     million tax rebate in 2000 alone.
       Over the same period, the company's profit before federal 
     income taxes totaled $1.785 billion. In none of these years 
     was the company's profit less than $87 million.

[[Page S737]]



                      LESS THAN ZERO: CORPORATE INCOME TAX PAYMENTS BY ENRON, 1996 TO 2000
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                2000     1999    1998    1997     1996    96-00
----------------------------------------------------------------------------------------------------------------
U.S. profits before federal income taxes....................     $618     $351    $189     $87     $540   $1.785
Tax at 35% corporate rate would be..........................      216      123      66      30      189      625
Less tax benefits from stock options........................     -390     -134     -43     -12      -19     -597
Less tax savings from other loopholes, etc..................     -104      -94     -36      -1     -173     -409
                                                             ---------------------------------------------------
Federal income taxes paid (+) or rebated(-).................     -278     -105     -13      17       -3     -381
----------------------------------------------------------------------------------------------------------------

       At the 35 percent tax rate, Enron's tax on profits in the 
     past five years would have been $625 million, but the company 
     was able to use tax benefits from stock options and other 
     loopholes to reduce its five-year tax total to substantially 
     less than zero.
       Among the loopholes used to reduce the company's tax 
     liability was the creation of more than 800 subsidiaries in 
     ``tax havens'' such as the Cayman Islands.
                                  ____


 Summary of Levin-McCain-Fitzgerald-Durbin Ending the Double Standard 
                for Stock Options Act, February 13, 2002

       The Enron fiasco has brought to light a long-festering 
     problem in how some U.S. corporations use stock options to 
     avoid paying U.S. taxes while overstating earnings. According 
     to one recent analysis reported in the New York Times, Enron 
     apparently failed to pay any U.S. tax in four out of last 
     five years, despite skyrocketing revenues and an alleged 
     five-year pre-tax income from 1996 to 2000, of $1.8 billion. 
     To sidestep paying about $625 million in taxes on its $1.8 
     billion in income, Enron apparently claimed stock option tax 
     deductions totaling almost $600 million. At the same time, 
     Enron never reported this $600 million as an expense on its 
     financial statements--an expense which, had it been reported, 
     would have reduced Enron's income by one-third.
       Enron was able to employ this stock option double standard, 
     because of accounting rules that allow stock option 
     compensation to be kept off a company's books. Right now, 
     many U.S. companies routinely give their executives large 
     numbers of stock options as part of their compensation. When 
     an executive exercises those options, the company can claim a 
     corresponding compensation expense on its tax return, while 
     at the same time employ accounting rules to omit reporting 
     any expense at all on its books. The company can tell Uncle 
     Sam one thing and its shareholders the opposite. That's just 
     what Enron did--it lowered its tax bill by claiming stock 
     option expenses on its tax returns, while overstating its 
     earnings by leaving stock option expenses off its financial 
     statements.
       The stock option loophole Enron used makes no sense, but 
     when the Financial Accounting Standards Board--the board that 
     issues accounting standards--tried to change the rules ten 
     years ago, corporations and audit firms fought the Board 
     tooth and nail. They demanded that companies be allowed to 
     continue to keep stock option compensation off the books. In 
     the end, the best the Board could get was a footnote noting 
     the earning charge that should be taken on a company's books. 
     But that stock option footnote--like so many Enron 
     footnotes--doesn't tell the true financial story of a 
     company.
       It's time to end the stock option double standard. The 
     Levin-McCain-Fitzgerald-Durbin bill would not legislate 
     accounting standards for stock options or directly require 
     companies to expense stock option pay, but it would require 
     companies to treat stock options on their tax returns the 
     exact same way they treat them on their financial statements. 
     In other words, a company's stock option tax deduction would 
     have to mirror the stock option expense shown on the 
     company's books. If there is no stock option expense on the 
     company books, there can be no expense on the company tax 
     return. If a company declares a stock option expense on its 
     books, then the company can deduct exactly the same amount in 
     the same year on its tax return. The bill would require 
     companies to tell Uncle Sam and their stockholders the same 
     thing--whether employee stock options are an expense and, if 
     so, how much of an expense against company earnings. Enron 
     has already shown how much damage, if not corrected, that the 
     existing stock option double standard can inflict on company 
     bookkeeping, investor confidence, and tax fairness.
       The bill cosponsors are Senators Levin, McCain, Fizgerald 
     and Durbin, and the bill is expected to be referred to the 
     Senate Committee on Finance.

  Section-by-Section Analysis of Ending the Double Standard for Stock 
                              Options Act

       Section 1. Short Title. The short title of the bill is 
     ``Ending the Double Standard for Stock Options Act.''
       Section 2. Stock Option Deductions and Tax Credits. This 
     section of the bill would amend two Internal Revenue Code 
     sections to address stock options compensation. The first tax 
     code section, 26 U.S.C. 83(h), addresses employer deductions 
     for employee wages paid for by a stock option transfer. The 
     second tax code section, 26 U.S.C. 41(b)(2)(D), addresses 
     employer tax credits for research expenses, including 
     employee wages.
       Subsection (a) of this section of the bill would add a new 
     paragraph (2) to the end of 26 U.S.C. 83(h) that would 
     restrict the compensation deduction that a company could 
     claim for the exercise of a stock option by limiting the 
     stock option deduction to the amount that the company has 
     claimed as an expense on its financial statement. This 
     section would also make it clear that the deduction may not 
     be taken prior to the year in which the employee declares the 
     stock option income. In addition, a new subparagraph (2)(B) 
     would require the Treasury Secretary to promulgate rules to 
     apply the new restriction to cases where a parent corporation 
     might issue stock options to the employees of a subsidiary 
     corporation or vice versa.
       Subsection (b) of this section of the bill would add a new 
     clause (iv) to the end of 26 U.S.C. 41(b)(2)(D). This new 
     clause would restrict the research tax credit that a company 
     could claim for employee wages paid for by the transfer of 
     property in connection with a stock option by saying that the 
     amount of the credit shall not exceed the amount of the 
     corresponding stock option deduction allowed under 26 U.S.C. 
     83(h).
       The purpose of both new statutory provisions is to ensure 
     that any stock option deduction or credit claimed on a 
     taxpayer's return will mirror, and not exceed, the 
     corresponding stock option expense shown on the taxpayer's 
     financial statement. If no stock option expense is shown on 
     the taxpayer's financial records, there can be no expense 
     taken as a deduction or credit on the taxpayer's return. If a 
     taxpayer declares a stock option expense on its financial 
     statement, then the taxpayer is permitted to claim a 
     corresponding deduction or credit on its return in the same 
     taxable year for exactly the same amount of expense.
       Subsection (c) of the bill provides that the amendments 
     made by the Act apply only to wages and property transferred 
     on or after the date of enactment of the Act.
                                  ____

     To: Steve M. Samek@ANDERSEN WO; Lawrence A. Reiger@ANDERSEN 
         WO; Gregory J. Jonas@ANDERSEN WO; Jeannot 
         Blanchet@ANDERSEN WO
     CC: Michael L. Bennett@ANDERSEN WO; D. Stephen Goddard 
         Jr.@ANDERSEN WO
     Date: 02/23/2001 09:56 AM
     From: David B. Duncan
     Subject: Enron Funding of FASB Trust
     Attachments:
       I recently asked Enron to consider funding the FASB Trust 
     pursuant to a Steve Samek request.
       Today, Rick Causey called to say that Paul Volker had 
     called Ken Lay (Enron Chairman) and asked Enron to make a 5 
     year, 100k per year commitment to fund the Trust Fund of 
     ``the FASB's International equivalent'' (best Rick could 
     remember). Lay is asking Causey if this is something that 
     they should do.
       While I believe Rick is inclined to do this given Enron's 
     desire to increase their exposure and influence in rulemaking 
     broadly, he is interested in knowing whether these type of 
     commitments will add any formal or informal access to this 
     process (i.e., would these type commitments present 
     opportunities to meet with the Trustees of these groups or 
     other benefits). I think any information along this front or 
     further information on the current strategic importance of 
     supporting these groups for the good of consistent rulemaking 
     would help Enron with its decision to be supportive.
       Could any of you guys help me out with more information or 
     point me to someone who could? Thanks.
                                  ____


                     [From USA Today, Feb. 8, 2002]

              Enron's Fall Fuels Push for Stock Option Law

                      (Matt Krantz and Del Jones)

       The Enron implosion has breathed life into legislation that 
     business leaders thought they had killed in the mid-1990s.
       In a highly controversial move, at least three senators 
     want to end the legal tax deductions companies take for stock 
     options they issue to executives and workers unless they 
     subtract the same expense from their earnings.
       As it is, almost every company takes a tax deduction for 
     options, but ignores them when it comes to reporting their 
     profits. Among the S&P 500, only Boeing and Winn-Dixie follow 
     the advice of the Financial Accounting Standards Board in 
     recording the cost of options on both ledgers, says David 
     Zion, analyst with Bear Stearns. The rest are like Enron, 
     which took a $625 million tax deduction for options from 1996 
     to 2000, yet legally included the $625 million on its 
     earnings.
       If stock options were treated as an expense, the earnings 
     reported by firms in the S&P 500 would have been 9% lower in 
     2000, Zion says. Technology companies, more likely to use 
     options for rank-and-file compensation, would be harder hit. 
     Fourteen companies, including Yahoo and Citrix Systems, would 
     have posted losses in 2000, rather than gains. Microsoft and 
     Cisco take large tax deductions for options.
       Options are contracts that allow the purchase of stock, 
     usually within five years, at today's price. If the stock 
     rises, the stock can be bought at a discount.
       Conventional wisdom has long held that options align the 
     goals of executives and workers with those of the 
     shareholders. Enron has given pause to that thinking because 
     its executives artificially boosted the stock price at the 
     risk of shareholders.
       Outright frauds is rare, but at least a half-dozen academic 
     studies have concluded that

[[Page S738]]

     companies time the release of good or bad news near the date 
     that executives are issued their options, orchestrating a 
     potential windfall.
       Sens. Carl Levin, D-Mich., John McCain, R-Ariz., and Peter 
     Fitzgerald, R-Ill., are dusting off the tax-deduction 
     proposal that was defeated by a vote of 88-9 in 1994. At the 
     time, Home Depot founder and CEO Bernard Marcus said he had 
     ``never been more strongly opposed to anything.''
       Citigroup CEO Sanford Weill was quick out of the chute 
     Thursday, warning on CNBC's Squawk Box not to get into an 
     Enron frenzy and hurry through bad legislation.
       But Matt Ward, CEO of WestWard Pay Strategies, an options 
     consulting firm in San Francisco, says he fears the 
     legislation stands a better chance of passing this time 
     because of what he calls the ``Enron thieves'' and because 
     technology companies have been weakened by the economy and 
     don't have the resources or energy to influence Washington.
       Ward says a law change would result only in rank-and-file 
     employees losing their stock options. CEOs would continue to 
     get theirs, he says.
       ``Noises are coming from Washington because some oil 
     company guys have been greedy,'' Ward says.
       David Yermack, associate professor of finance at New York 
     University's Stern School of Business, says he doubts if 
     stock options could have pushed Enron executives into hiding 
     millions of dollars of losses in off-book partnerships. That 
     said, there is no reason options should not count against 
     earnings jut as cash compensation does.
       ``If Enron has made them reconsider this horrible position, 
     there is silver lining to this debacle,'' Yermack says.
       More than 80% of financial analysts and portfolio managers 
     agree with Yermack, according to a survey by the Association 
     for Investment Management and Research.
       ``I'm dissatisfied with using fuzzy numbers in doing 
     accounting,'' says Dick Wagner, president of the Strategic 
     Compensation Research Associates.
                                  ____


                [From the New York Times, Feb. 3, 2002]

              Even Last Year, Option Spigot Was Wide Open

                          (By Stephanie Strom)

       Surprise, surprise. Early reports suggest that top 
     executives across America got a bigger dollop of stock 
     options last year as part of their pay.
       As corporate earnings and cash flow have ebbed and stock 
     prices have fallen, boards have been doling out options as a 
     cheap, balance-sheet-friendly way of compensating mangers. 
     The annual proxy season, when companies reveal compensation, 
     is just starting. If the disclosures show the trend toward 
     larger option grants holding after a year that most companies 
     would lie to forget, it would seem to make a mockery of the 
     concept of pay for performance. That was the reason options 
     grew so popular in the first place. Yet while some companies 
     are trying to make options better reflect their fortunes, 
     most other simply contend that options are primarily a 
     motivational tool and have never been a reward for 
     performance.
       With stock prices stalled, options may not seem attractive 
     now. But executives who receive them can usually count on 
     rich rewards eventually, even if a company does only 
     marginally better. The increase in options, however imposes 
     additional costs on shareholders; the more options granted, 
     the lower the return for investors, since their holdings are, 
     one way or the other, diluted.
       But the options keep coming. Chief executives who received 
     more of them last year, even as their companies suffered, 
     include Daniel A. Carp of Eastman Kodak, John T. Chambers of 
     Cisco Systems, Scott G. McNealy of Sun Microsystems and 
     Harvey R. Blau of Aeroflex
       And Henry B. Schacht, returning to the helm of troubled 
     Lucent, received annual options grants almost five times the 
     size of those his predecessor received--and more than 17 
     times the size of the last grant he received the year he 
     retired. ``Fiscal 2001 was rather challenging for Lucent, so 
     the grants were made to ensure Henry had management stability 
     through the turnaround,'' said Mary Lou Ambrus, a Lucent 
     spokeswoman, in explanation.
       Changes are, many chief executives received bigger options 
     awards, as proxy statements, filed each March and April by 
     most companies, are expected to show, experts say. Some were 
     no doubt issued to make up for previous grants that had been 
     rendered worthless by tumbling stock prices.
       At the same time, the market's recovery has revived hopes 
     that old option grants will not be worthless. ``Options 
     typically run for 10 years, and already many of the ones 
     issued in the last year are back in the money,'' said John N. 
     Lauer, chief executive of Oglebay Norton, a shipping company. 
     ``If the economy recovers, those issued in previous years 
     will also regain value.''
       Mr. Lauer has gained notoriety in corporate circles for his 
     insistence on being paid entirely in options priced well 
     above Oglebay's stock price. Though Oglebay's performance 
     has improved somewhat, options he received five years ago 
     are still worth nothing.
       ``In a social setting where I'm in a room with other 
     C.E.O.'s, someone will teasingly suggest that they pass the 
     hat for me because I'm not making any money,'' he said. ``I 
     think they figure I'm loony or something.''
       Mr. Lauer is not the only executive to have high 
     performance goals, but it is safe to say that most executives 
     keep drawing large salaries, plus more and more options. 
     According to a survey done in the third quarter of last year 
     by Pearl Meyer & Partners, a human resources consulting firm 
     in New York, the number of options granted by 50 major 
     companies that will report their 2001 compensation this 
     spring was up an average of 12 percent from 2000.
       Consultants expect that trend to continue as companies 
     report 2001 compensation practices this spring. ``It's a 
     great time to give options,'' said Pearl Meyer, president of 
     the firm. ``They're cheap because they involve no charge to 
     earnings, and that's important at a time when profits are 
     down and boards are trying to make up for the fact that 
     salaries and bonuses are both down.''
       But Ms. Meyer and many others in the field--as well as, 
     they say, the members of corporate compensation committees--
     are not happy to see the increase in options grants. Their 
     expressions of concern are striking because of compensation 
     consultants have been among the biggest champions of the use 
     of options as performance incentives.
       The consultants are worried, in part, about the option 
     ``overhang''--options outstanding, plus those shares that 
     investors have authorized but that have yet to be granted. 
     More fundamentally, they suggest that the links between a 
     manager's pay and a company's performance--as measured by, 
     say, profitability, market-share growth and smart acquisition 
     strageties--have become more tenuous.
       Ms. Meyer suggests that the at-risk components of executive 
     pay be viewed as the legs of a stool; the legs reflecting 
     stock performance has grown longer and longer, while those 
     reflecting business and financial performance have become 
     shorter.
       ``We have overdosed on options and the stock market,'' she 
     said. ``We're dependent on the stock market for executive 
     compensation, pension payments, directors' compensation, 
     401(k) plans--our whole economy, practically, is dependent on 
     the market's performance.''
       That reliance has produced an overhang that dangles like a 
     sword of Damocles over investors. Eventually, their stakes 
     will be diluted--either when companies issue vast quantities 
     of new shares to make good on options grants, or when they 
     undertake share-repurchase programs that eat up cash they 
     might use for operations.
       According to a study by Watson Wyatt Worldwide, a human 
     resource consulting company, the average options overhang of 
     the companies in the Standard & Poor's 500-stock index was 
     14.6 percent of outstanding shares in 2000, up from 13 
     percent a year earlier.
       This spring's numbers will probably show another rise. The 
     overhang ``is definitely going to be up'' by a percentage 
     point or more in 2001, said Ira T. Kay, a consultant at 
     Watson Wyatt Worldwide, ``because people aren't exercising 
     their options the way they were when the stock market was 
     booming.''
       Mr. Kay predicted that the slowdown in the exercising of 
     options would work to curb the issuing of new ones this year 
     and next, although he anticipates a slow increase over the 
     long term. ``I've been in meetings of five boards that were 
     very reluctant to go to shareholders to ask for more shares 
     to underwrite options grants,'' he said, ``They don't 
     think they can justify it.''
       Companies are losing out on another salutary benefit of 
     options compensation as well--their ability to reduce 
     corporate taxes. Employers get a deduction when employees 
     exercise options, but as Mr. Kay and other compensation 
     consultants note, these days few are cashing them in.
       Oddly, shareholder advocates and institutional investors, 
     who stand to lose the most from an option glut, seem sanguine 
     thus far. Some note that while option awards have increased, 
     the value of the awards has collapsed. Pearl Meyer's research 
     shows that the value of option grants fell 7 percent in the 
     first eight months of 2001 after rising steadily for several 
     years.
       Some shareholder advocates say that will also help curb 
     future grants, as long as stocks are sluggish.
       ``We've had a 20 percent drop in the Standard & Poor's 
     index,'' said Patrick S. McGurn, of Institutional Shareholder 
     Services, a consulting business in Rockville, MD. ``And the 
     standard valuation method for options would tell that you'd 
     have to double or triple grants just to get to the level 
     where you were the previous year. Most boards are going to 
     balk at those numbers, particularly when corporate 
     performance has been so poor.''
       But that may be wishful thinking. Last year, Eastman Kodak 
     took $659 million in restructing charges that, combined with 
     falling sales and market share, pushed its earning down 95 
     percent. In November it awarded its chief executive, Mr. 
     Carp, options for 250,000 shares at an exercise price of 
     $29.31, Kodak's stock price at the time. All Mr. Carp must do 
     to gain is keep Kodak's stock level.
       That grant came on top of the 100,000 options he received 
     in January 2001 at a strike price of $40.97. So Mr. Carp 
     received three and a half times as many options in 2001 as he 
     did in 2000--at markedly lower strike prices. Sandra R. Feil, 
     director for worldwide total compensation at Kodak, said Mr. 
     Carp received two awards last year because the company had 
     changed the time of its grants, to November from January.
       As for the increase, Ms. Feil said Kodak had worked with 
     Frederic W. Cook & Company, a compensation consultant, which

[[Page S739]]

     found that Mr. Carp was in the lowest 25 percent of 
     executives receiving options. ``What we've done,'' she said, 
     ``is taken a step, and even a conservative step at that, in 
     getting him out of the lowest quartile.''
       But what about Kodak's dismal performance last year? ``We 
     look at stock options as a long-term incentive that's 
     forward-looking,'' Ms. Feil said. ``We don't look at them as 
     a reward for past performance.
       To understand just how easy it is to get richer and richer 
     on options, consider the case of Lawrence J. Ellison, 
     chairman, chief executive and co-founder of the Oracle 
     Compensation, the software maker. In January, with Oracle's 
     stock trading just above $30, near its yearly high of $34, 
     Ellison exercised option grants for about 23 million shares 
     at an average price of 23 cents, for a paper profit of more 
     than $700 million.
       It was the biggest options bonanza on record--and Mr. 
     Ellison holds options to buy an additional 47.9 million 
     shares. ``He could end up taking $3 billion out of the 
     company,'' said Judith Fischer, managing director of 
     Executive Compensation Advisory Services, a consulting firm.
       Investors are often forgiving of founders like Mr. Ellison, 
     many of whom staked personal assets and invested buckets of 
     sweat equity to get companies off the ground. His paper 
     profit has shrunk to $378 million as Oracle's stock has 
     sagged.
       But investors were still piqued by Mr. Ellison's timing. He 
     exercised his options a month before Oracle issued an 
     earnings warning. The options expired on Aug. 1; he was under 
     no pressure to sell them in January.
       To protect shareholders from dilutions from options, Oracle 
     routinely buys shares in the market. Other big corporate 
     users of options, like Microsoft and Dell Computer, do, too, 
     contending that it not only protects shareholders, but offers 
     them tax advantages.
       But repurchase programs can also have a huge impact on a 
     company's cash flow. Oracle started the fiscal year that 
     began June 1, 2000, with $7.4 billion in cash, then spent 
     $4.3 billion to repurchase shares largely for use in its 
     options program.
       At the end of the fiscal year, the company's overhang stood 
     at 28 percent of total outstanding shares. Microsoft has a 
     similarly large overhang, but it also has more cash.
       For years, shareholders have pushed companies to make chief 
     executives earn their keep, and they initially applauded the 
     use of options to accomplish that goal. But companies found 
     ways to make sure the options were worth something regardless 
     of performance, by repricing worthless options or replacing 
     them with fistfulls of new ones.
       The outcry over those practices, however, may be pushing 
     some companies to make changes.
       In the spring of 1999, the Longview Collective Investment 
     Fund, which manages some A.F.L.-C.I.O. pension money, 
     submitted a shareholder proposal to the Chubb Corporation, 
     the insurer, asking it to grant options that would more 
     closely align compensation with performance.
       The proposal was defeated. But when Beth W. Young, an 
     independent consultant who advises the A.F.L.-C.I.O. and 
     other pension fund managers, called Chubb the next spring to 
     resubmit the proposal, she was told that Chubb had already 
     incorporated into its incentive plan options that could be 
     exercised only if the stock price rose significantly.
       Roughly half the options handed out to Chubb's senior 
     management in 2000 and 2001 have an exercise price 25 percent 
     higher than the stock price on the day they wre granted. But 
     only 2 percent to 4 percent of large companies use such 
     ``premium priced'' options, consultants say.
       ``The executives who were granted these options will, at 
     least in theory, have a much stronger incentive to take steps 
     to increase the stock price,'' said Donald B. Lawson, the 
     Chubb senior vice president who manages compensation and 
     benefits.
       Chubb also uses ``performance shares,'' which can typically 
     be redeemed only after three years and only if the company 
     clears specific hurdles. In 2000, for example, the 
     performance shares it handed out in 1998 were worthless 
     because the company did not hit those targets.
       For Dean R. O'Hare, Chubb's chief executive, that meant his 
     total compensation fell by $448,508 from the previous year. 
     he did get more options, but those largely replaced 
     restricted shares--those that cannot be sold right away--
     after the company decided not to use them to reward 
     executives, Mr. Lawson said.
       Performance shares held by C. Michael Armstrong, the chief 
     executive of AT&T, have proved to be worthless for three 
     years as the company has fallen short of the board's goals 
     for increases in total return to shareholders.
       An options award for 419,200 shares granted to Mr. 
     Armstrong at the end of 2000 was also tied to better 
     performance. The options can be exercised only if AT&T 
     produces a $145 billion pretax gain for shareholders in the 
     year that started March 31. On the other hand, another twist 
     on options accelerates the vesting period if a company's 
     shares reach a certain target. In 2000, the Williams 
     Companies granted options with the condition that if, on 
     certain days, the stock traded at 1.4 times the price at the 
     beginning of the year, the options could be exercised 
     immediately rather than over three years.
       Other companies are working to get more plain-vanilla 
     stock, not options, into executives' hands--stock they must 
     buy. When Beazer Homes USA, a home builder, went public in 
     1994, it adopted a management stock purchase program to 
     increase managers' stakes. At the beginning of each year, 
     some 80 executives can choose to give up a percentage of 
     their bonuses to buy stock at a 20 percent discount on the 
     year-end closing price. The stock cannot be sold for three 
     years.
       Executives now own roughly 8 percent of the company, said 
     David S. Weiss, Beazer's chief financial officer. ``We think 
     it's a good idea to have them put real money at risk, as 
     opposed to just receiving a reward,'' he said. ``Options feel 
     like a gift from the company that the market, through its 
     whims, will reward or not. Shares reflect the company's 
     performance, whether good or bad.''
       Mr. Kay, at Watson Wyatt, said such pure stock subsidies 
     were gaining popularity. More companies, he said, plan to use 
     contingent options like those at Chubb and AT&T, which try to 
     reflect financial and business performance.
       Investors expect the BellSouth Corporation and the Eaton 
     Corporation, for example, to disclose such adjustments in 
     their new proxy statements. A spokesman for Eaton said he was 
     unaware of such a move, and a spokesman for BellSouth 
     declined to comment until the proxy is released in March.
       But other boards are already finding ways to limit the 
     risks that performance shares, premium-priced options, 
     performance-accelerated options and other performance-linked 
     tools pose.
       Until last April, Archie W. Dunham, chief executive of 
     Conoco, had options giving him the right to buy 700,000 
     shares. But he could exercise them only if Conoco's shares 
     traded about $35 on each of the five days before Aug. 17 of 
     this year.
       Before Conoco bought Gulf Canada Resources in July, 
     however, its board granted a two-year extension to Mr. Dunham 
     and at least six other executives holding those options. 
     ``The board thought the climate was right this year for some 
     kind of an acquisition but that it could have an adverse 
     effect on the stock price,'' John McLemore, a Conoco 
     spokesman, said. ``They thought it wouldn't be really fair 
     for those people who held these options to be punished for 
     something that might make it harder for them to meet the 
     conditions.''
       That means the board rewarded Mr. Dunham and his colleagues 
     for an acquisition that it knew was likely to hurt Conoco's 
     shares, at least temporarily--a courtesy not extended to 
     shareholders.
                                  ____


               [From the Washington Post, Jan. 30, 2002]

                          Stock Option Madness

                        (By Robert J. Samuelson)

       As the Enron scandal broadens, we may miss the forest for 
     the trees. The multiplying investigations have created a 
     massive whodunit. Who destroyed documents? Who misled 
     investors? Who twisted or broke accounting rules? The answers 
     may explain what happened at Enron but necessarily why. We 
     need to search for deeper causes, beginning with stock 
     options. Here's a good idea gone bad--stock options foster a 
     corrosive climate that tempts many executives, and not just 
     those at Enron, to play fast and loose when reporting 
     profits.
       As everyone knows, stock options exploded in the lasted 
     1980s and the 1990s. The theory was simple. If you made top 
     executives and managers into owners, they would act in 
     shareholders' interests. Executives' pay packages became 
     increasingly skewed toward options. In 2000, the typical 
     chief executive officer of one of the country's 350 major 
     companies earned about $5.2 million, with almost half of that 
     reflecting stock options, according to William M. Mercer 
     Inc., a consulting firm. About half of those companies also 
     had stock-option programs for at least half their employees. 
     Up to a point, the theory worked. Twenty years ago, America's 
     corporate managers were widely criticized. Japanese and 
     German companies seemed on a roll. By contrast, their 
     American rivals seemed stodgy, complacent and bureaucratic. 
     Stock options, were one tool in a managerial upheaval that 
     refocused attention away from corporate empire-building and 
     toward improved profitability and efficiency.
       All this contributed to the 1990s' economic revival. By 
     holding down costs, companies restrained inflation. By 
     aggressively promoting new products and technologies, 
     companies boosted production and employment. But slowly, 
     stock options became corrupted by carelessness, overuse and 
     greed. As more executives developed big personal stakes in 
     options, the task of keeping the stock price rising became 
     separate from improving the business and its profitability. 
     This is what seems to have happened at Enron.
       The company adored stock options. About 60 percent of 
     employees received an annual award of options, equal to 5 
     percent of their base salary. Executives and top managers got 
     more. At year-end 2000, all Enron managers and workers had 
     options, that could be exercised for nearly 47 million 
     shares. Under a typical plan, a recipient gets an options to 
     buy a given number of shares at the market price on the day 
     the option is issued. This is called ``the strike price.'' 
     But the option usually cannot be exercised for a few years. 
     If the stock's price rises in that time, the option can yield 
     a tidy profit. The lucky recipient buys at the strike price 
     and sells at the market price. On the 47 million Enron 
     options, the average ``strike price was about

[[Page S740]]

     $30 and at the end of 2000, the market price was $83. The 
     potential profit was nearly $2.5 billion.
       Given the huge reward, it would have been astonishing if 
     Enron's managers had not become obsessed with the company's 
     stock price and--to the extent possible--tried to influence 
     it. And while Enron's stock soared, why would anyone complain 
     about accounting shenanigans? Whatever the resulting abuses, 
     the pressures are not unique to Enron. It takes a naive view 
     of human nature to think that many executives won't strive to 
     maximize their personal wealth.
       This is an invitation to abuse. To influence stock prices, 
     executives can issue optimistic profit projections. They can 
     delay some spending, such as research and development (this 
     temporarily helps profits). They can engage in stock buybacks 
     (these raise per-share earnings, because fewer shares are 
     outstanding). And, of course, they can exploit accounting 
     rules. Even temporary blips in stock prices can create 
     opportunities to unload profitable options.
       The point is that the growth of stock options has created 
     huge conflicts of interest that executives will be hard-
     pressed to avoid. Indeed, many executives will coax as many 
     options as possible from their compensation committees, 
     typically composed of ``outside'' directors. But because 
     `'directors are [manipulated] by management, sympathetic to 
     them, or simply ineffectual,'' the amounts may well be 
     excessive, argue Harvard law professors Lucian Arye Bebchuk 
     and Jesse Fried and attorney David Walker in a recent study.
       Stock options are not evil, but unless we curb the present 
     madness, we are courting continual trouble. Here are three 
     ways to check the overuse of options:
       (1) Change the accounting--count options as a cost. 
     Amazingly, when companies issue stock options, they do not 
     have to make a deduction to profits. This encourages 
     companies to create new options. By one common accounting 
     technique, Enron's options would have required deductions of 
     almost $2.4 billion from 1998 through 2000. That would have 
     virtually eliminated the company's profits.
       (2) Index stock options to the market. If a company's 
     shares rise in tandem with the overall stock market, the 
     gains don't reflect any management contribution--and yet, 
     most options still increase in value. Executives get a 
     windfall. Options should reward only for gains above the 
     market.
       (3) Don't reprice options if the stock falls. Some 
     corporate boards of directors issue new options at lower 
     prices if the company's stock falls. What's the point? 
     Options are supposed to prod executives to improve the 
     company's profits and stock price. Why protect them if they 
     fail?
       Within limits, stock options represent a useful reward for 
     management. But we lost those limits, and options became a 
     kind of free money sprinkled about by uncritical corporate 
     directors. The unintended result was a morally lax, get-rich-
     quick mentality. Unless companies restore limits--prodded, if 
     need be, by new government regulations--one large lesson of 
     the Enron scandal will have been lost.
                                  ____


                [From the New York Times, Jan. 27, 2002]

   Economic View; Enron's Way: Pay Packages Foster Spin, Not Results

                          (By David Leonhardt)

       As the stock plummeted, investors and employees alike were 
     left with big losses. But one group of shareholders came out 
     ahead--management. Many board members and top executives 
     managed to sell millions of dollars of shares before the big 
     fall and still have something to show for the stock's once-
     lofty price.
       This is the story of Enron, of course, but it hardly ends 
     there. Over the last two years, as the stock market has 
     fallen about 30 percent from its peak, the description fits 
     dozens of other companies as well. For example, Roger G. 
     Ackerman, the former chairman of Corning, sold $14 million of 
     the company's stock last year, mostly when it was trading at 
     about $57 a share, or seven times its current price. Donald 
     R. Scifres, the co-chairman of JDS Uniphase, made $23 million 
     selling company shares last year; the stock has lost nearly 
     90 percent of its value since January 2001. David R. Alvarez 
     sold $14 million worth of stock in Providian Financial, where 
     he is vice chairman, last year before the company 
     acknowledged that its balance sheet wasn't quite what it was 
     cracked up to be. The stock, which traded at $60 a share last 
     summer, now trades at around $4.
       Some of the biggest paydays have come at obscure companies 
     that were once market darlings, John J. Moores, better known 
     as the owner of the San Diego Padres baseball team, made $101 
     million last year selling shares of Peregrine Systems, on 
     whose board he serves, before its shares fell by more than 
     two-thirds. Richard Aube, a director at Capstone Turbine, 
     made $51 million selling its stock last year, according to 
     Thomson Financial. If you bought when we sold at around $30 a 
     share, your investment would be showing an 80 percent loss 
     now.
       The contrast is obviously cringe-inducing. But it is more 
     than that. Even when executives simply fail to live up to 
     their own predictions--rather than break the law, as some 
     people suspect that Enron managers did--the big insider 
     paydays offer a good lesson in how economic incentives are 
     askew in corporate America.
       Corporate spin aside, executives do not always prosper most 
     by making their companies great. They can often profit more 
     from creating unrealistic expectations than from delivering 
     consistently impressive results.
       Consider two companies. One has a stock price that has 
     appreciated slowly, starting at $20 five years ago and 
     gaining $2 a year, to $30 today. The second company's stock 
     also started at $20 five years ago, then zoomed to $100 after 
     a few years but has since fallen back to $20.
       By any reasonable measure, the leaders of the first company 
     have done a better job. Their share price has grown 50 
     percent, and they have avoided making gradiose predictions 
     that cause Wall Street analysts to set silly targets. The 
     second company has a stock that has underperformed a 
     savings account over the long run, and scores of workers 
     and investors have been burned by false hopes.
       Yet if the top executives of both companies had received 
     similar amounts of stock and both sold their shares on a 
     regular schedule, the executives of the second company would 
     actually be ahead. They would have made so much money selling 
     the stock when it was trading near $100 that they would be 
     multimillionaires despite the humbling decline.
       This is the Enron model of pay for performance, and it has 
     become common. Executives receive enormous grants of stock or 
     options, saying they are simply aligning their own interests 
     with those of their shareholders. But the packages are so 
     generous that even a temporary rise in the share price, 
     accompanied by the sale of a portion of an executive's stock, 
     can leave him set for life. The appeal of overly aggressive 
     accounting methods and manipulated earnings becomes obvious.
       ``You're providing C.E.O.'s with a perverse incentive,'' 
     said Nell Minow, the editor of the Corporate Library, a 
     research firm in Washington. ``You're rewarding them for a 
     goal that is not in the interest of long-term shareholders.''
       The executives who have made millions of dollars selling 
     once-expensive shares say they have done nothing wrong. They 
     simply followed a regular, legal schedule of selling stock, 
     they say, and would be far richer if the stock price had not 
     dropped.
       All of that is usually true. But it is also true that when 
     an economic system richly rewards certain behavior, no one 
     should be surprised when that behavior becomes the norm. If 
     you want to change it, you have to change the incentives. The 
     Enron mess has the potential to focus people's attention on 
     the complicated task of doing precisely that.
                                  ____


                  [From AIMR Exchange, Jan.-Feb. 2002]

Employee Stock Options Should Be Expensed on Income Statements, Survey 
                                 Shows

       In September 2001, AIMR surveyed more than 18,000 members 
     to gauge their responses to a proposed agenda topic of the 
     International Accounting Standards Board (IASB) that could 
     require companies to report the fair value of stock options 
     granted--including those to employees--as an expense on the 
     income statement, reducing earnings. Although share-based 
     payments to employees and others are increasing worldwide, 
     few countries currently have national standards on the topic.
       Do you consider share-based (or stock option) plans to be 
     compensation to the parties receiving the benefits of these 
     plans?
       Answer. Yes, 88%; no, 6%; it depends, 6%.
       Do firms you evaluate and monitor have shared-based (or 
     stock option) plans that grant shares of the firm's stock?
       Answer. Yes, 85%; no, 6%; not sure, 9%.
       Do you use the information and data that companies provide 
     on share-based plans in your evaluation of the firm's 
     performance and determination of its value?
       Answer. Yes, only when it is recognized as a compensation 
     in the income statement; 15%; yes, regardless of whether it 
     is recognized in the income statement, 66%; no, 19%.
       Survey results are based on a random polling of more than 
     18,000 AIMR members, with a 10% response rate.
       Do the current accounting requirements for share-based 
     payments need improving, in particular, for those plans 
     covering employees?
       Answer. Yes, 74%; no, 26%.
       Should the accounting method for all share-based payment 
     transactions (including employee stock option plans) require 
     recognition of an expense in the income statement?
       Answer. Total response: Yes, 83%; no, 17%.

  Mr. McCAIN. Mr. President, I rise today to introduce legislation with 
Senators Levin, Fitzgerald, and Durbin, entitled Ending the Double 
Standard for Stock Options Act. This legislation requires companies to 
treat stock options for employees as an expense for bookkeeping 
purposes if they want to claim this expense as a deduction for tax 
purposes. We introduced similar legislation in 1997 during the 105h 
Congress but unfortunately, the special interest with a vested stake in 
the status quo prevented this legislation from seeing the light of day.
  Currently, corporations can hide these multimillion-dollar 
compensation plans from their stockholders or other investors because 
these plans are not counted as an expense when calculating company 
earnings. Even the Federal Accounting Standards Board, FASB, recognized 
that stock options

[[Page S741]]

should be treated as an expense for accounting purposes. Accounting 
disclosure rules issued by FASB require that companies include in their 
annual reports a footnote disclosing what the company's net earnings 
would have been if stock option plans were treated as an expense.
  The latest scandals involving the collapse of Enron highlight the 
problem of misleading annual statements and financial statements. 
According to a recent analysis, from 1996 to 2000, Enron issued nearly 
$600 million in stock options, collecting tax deductions which allowed 
the corporation to severely reduce their payment in taxes. Whether or 
not Enron took advantage of current disclosure rules to hide their 
financial problems remains a question. The fact remains that current 
rules allow companies such as Enron to discuss as little as possible. 
And this prevents investors, Wall Street analyst, corporate executives, 
and auditors from properly understanding the bottom line of 
corporations.
  One might reasonably ask how an arcane accounting rule could have 
such a large impact on the bottom line of corporations. The answer lies 
in the growth and value of stock options as a means of executive 
compensation.
  We have heard the reports of executives making multimillion-dollar 
salaries, while average worker salaries stagnate or fall. According to 
one recent report, almost half of the earnings of the typical chief 
executive officer of a top company reflects stock options. Why 
shouldn't the value of this compensation package be included in 
calculating a company's earnings? How can stockowners evaluate the true 
value of employee compensation if the value is just buried in a 
footnote somewhere the annual report?
  No other type of compensation gets treated as an expense for tax 
purposes, without also being treated as an expense on the company 
books. This double standard is exactly the kind of inequitable 
corporate benefit that makes the American people irate and must be 
eliminated. If companies do not want to fully disclose on their books 
how much they are compensating their employees, then they should not be 
able to claim a tax benefit for it.
  This legislation does not require a particular accounting treatment; 
the accounting decision is left to the company. This legislation simply 
requires companies to treat stock options the same way for both 
accounting and tax purposes.
  I hope my colleagues will join us in cosponsoring this important 
legislation that will end the double standard for stock option 
compensation.
                                 ______