Our Issues
Broad-based Employee Ownership Through Stock Options
Stock Options Accounting
One of TechNet’s leading priorities has been to preserve broad-based employee ownership through stock options. In the high technology and biotechnology industries that TechNet represents, stock options and broad-based employee ownership have been an engine of growth, helping to build some of the nation's most innovative companies. TechNet member companies - including many of today's technology leaders as well as start-ups - have grown due in large part to the ability to use employee stock options to attract and retain skilled employees at all levels of the corporation.
The importance of broad-based stock options and their impact on economic growth is undisputed. Studies confirm that broad-based plans have a significant impact on productivity, innovation and economic activity. Companies that offer stock options to most or all employees have experienced significant increases in productivity.
Rutgers University Professors Joseph Blasi and Douglas Kruse have provided detailed empirical evidence that companies with broad-based employee stock option plans receive a significant boost to productivity and shareholder returns. Other studies and anecdotal evidence by employees and managers in a range of industries confirm the power of stock options to motivate employees through equity ownership. In the technology industries, broad-based employee ownership has powered our nation’s rise to world leadership in innovation and economic growth.
Following enactment of SFAS 123R, mandating expensing of employee stock options, TechNet is committed to working with the Securities and Exchange Commission, Congress and other policymakers, to support market-based approaches that result in more accurate stock option valuations and protections against merit-less litigation for well-intentioned preparers of financial statements, consistent with SFAS 123R.
Section 409A
TechNet also strongly supports changes to the proposed regulations for Section 409A of the Internal Revenue Code added by the American Jobs Creation Act of 2004 to address deferred compensation. In early 2005, Treasury/IRS issued Notice 2005-1, providing guidance on section 409A including provisions that adversely impact the ability of companies to issue stock options.
In effect, Notice 2005-1 provides that options issued with an exercise price below the fair market value of the underlying stock at the time of grant are subject to onerous tax rules. The options would be taxable to the employee at the time the option vests (rather than when it is exercised) and the employee would be subject to a 20% excise tax. This issue has a significant impact on both private companies and newly public companies given the inherent difficulty in valuing stock options. Our nation's rules and regulations must not discourage the participation of all of a company's employees in a broad-based stock option plan. More than 14 million workers hold stock options, 80 percent of who make under $75,000 per year. Stock options are a vital tool that helps U.S. companies attract and retain bright workers and discouraging their use will not aid the American economy against challenges from Europe, China and India.
TechNet and the technology industries will continue to support thoughtful and reasoned responses to issues of corporate accountability and public policies that serve investors by encouraging broad-based employee ownership and economic growth.
Other Resources:
TechNet Comments on Proposed Regulations Issued Pursuant to Section 409A –
Treatment of Stock Options, January 3, 2005
TechNet Comments on FASB Expensing Proposal, June 29, 2004
Study Shows Extent of Broad-based Stock Options As FASB Announces Decision To Expense Stock Options, March 2004
TechNet Comments on Accounting for Stock-Based Compensation: A Comparison of FASB Statement 123 and IASB Proposed IFRS, Share-based Payment, February 1, 2003
TechNet and AeA Propose Guidelines For Expanded Employee Stock Options Information, November 14, 2002
TechNet Comments on Accounting for Stock-Based Compensation - Transition and Disclosure, November 4, 2002
For more facts about employee stock options, the negative impact of mandatory expensing on broad-based plans and issues raised by current valuation models, please visit www.SaveStockOptions.org.
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