A decision due today could begin settling a question that has long pitted small shareholders against corporate executives: Should the value of stock options given to employees be subtracted from company earnings?
The Financial Accounting Standards Board, a seven-member panel that sets accounting rules, is due to vote this morning on proposals that would make companies either subtract the value of the options from profits, as the FASB staffers want, or simply describe the options more clearly in earnings reports, as many executives prefer.
Companies as large as the Chevy Chase-based insurer GEICO Corp. and start-ups such as Rockville-based Univax Biologics Inc. warn that the FASB staff proposal would hurt not only their companies but also the economy as a whole by reducing earnings and cutting employees' compensation.
But some accountants and shareholders disagree, arguing that the executives are just trying to maintain a "freebie" they've collected for years.
"Up until now, the companies have been giving away something of value," and stockholders have paid for the options without realizing it, said Liz Fender, FASB's assistant project leader for the proposal.
The panel is set to decide today which proposal to send for public comment, Ms. Fender said. A final decision is expected next year.
Under current accounting rules, companies can give their employees options to buy stock at some point in the future at prices set now without subtracting the value of those options from the companies' earnings.
Although many companies offer options on just a few hundred shares as a bonus to reward employees, some of these packages have been more lucrative. Walt Disney Co. Chief Executive Officer Michael D. Eisner, for example, reaped $197 million last year thanks to stock options.
But since 1984, FASB staffers have accepted that the options havea value. And, they argued, options should be treated as an expense, just like the cost of salaries and benefits.
The staff's recommendation has been widely opposed by executives and even some shareholder groups, who have submitted an alternative, Ms. Fender said.
A group including the "Big Six" accounting firms, large shareholder groups (including institutional investors) and dozens of corporate executives have asked that the FASB instead consider increasing reporting requirements, so that options would be discussed, but not subtracted from profits, in quarterly reports.
Robert Snyder, controller of Landover-based Trident Systems Inc. said his computer consulting company wrote to FASB complaining the proposal would hurt Trident's ability to pay competitive salaries to its 60 employees.
"In a firm in extended rapid growth mode, you don't always have the cash to be able to reward employees" as one should, he said.
So Mr. Snyder, who said he pays systems analysts a little less than the going salaries of $70,000 to $80,000 a year, makes up for lower pay and a poorer benefit package with stock options.
Having to subtract the value of those options from the company's earnings would hurt its future, he said. "This would put a nice round hole in our earnings, [which in turn] would hurt our ability to bring in venture capital and develop products."
For Cabot Kaskie, chief financial officer at the vaccine development company Univax Biologics, the problem is that the FASB proposal would mean Univax would be forced to reduce its earnings even though many of the options appear worthless.
"We've given options to employees at $12 per share" in the past, he said. Univax stock closed yesterday at $6.75 a share.
But while some shareholders and accountants agree it would be difficult to assign a precise value to stock options, they say that doesn't mean they are worthless.
Robert Thompson, an assistant professor in the accounting department at the University of Maryland, said he thinks the options ought to be subtracted from earnings because it would give shareholders a better sense of how their companies were doing.
Despite new SEC disclosure rules, current rules give investors only "a ballpark idea" of how much an executive is earning through options, he said.
And Warren Buffett, one of the nation's most successful investors and chairman of Berkshire Hathaway Inc., told his shareholders in a letter last month: "It is both silly and cynical to say that an important item of cost should not be recognized simply because it can't be quantified with pinpoint precision."