NEW YORK — In a ruling that could change the way many Americans are paid, the nation's top accounting authority is expected to decree as early as today that companies must treat employee stock options as business expenses when they are issued.
The Financial Accounting Standards Board ruling would be a defeat for Silicon Valley technology firms that have lobbied passionately against having to "expense" options by deducting their value from earnings in public financial reports.
Right now, companies can pay employees with stock options -- a sort of IOU on future growth -- without draining cash or depressing reported profits the way that ordinary salaries do. Options have been a cheap means for cash-poor, high-growth companies to attract and retain top employees.
Critics contend that the way options have been accounted for on income statements is fundamentally dishonest and can no longer be tolerated in the wake of the Enron Corp. and WorldCom Inc. accounting scandals, among others.
As billionaire investor Warren E. Buffett, long an advocate of options reform, put it in a 1999 commentary: "If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?"
The ruling would be one of the most important U.S. bookkeeping changes since 1974, when Congress passed the Employee Retirement Income Security Act, forcing corporations to back up their pension obligations with cash instead of just promises.
Before being adopted, however, the accounting board's action would have to go through a public comment period of 90 days or more, FASB spokeswoman Sheryl Thompson said, and probably would not take effect until 2005.
An option is a contract allowing the holder to buy stock at a specified price for a specified time period, typically 10 years for employee options. If the stock soars, options can create instant millionaires. That was a common phenomenon in Silicon Valley during the 1990s stock market boom, and helped inflate California's income tax revenue collections.
But options cut both ways: When the tech-stock bubble burst, many holders saw their nest eggs built with stock options shrink or even disappear. And the state government suddenly saw a decline in tax collections, contributing to the budget crisis.
The granting of lucrative options has also been a theme in the criticism of runaway compensation packages for chief executives, many of whom derive more of their income from options than from salaries.
For corporations, stock options were never exactly "free money." At some level, investors have understood that when a company awards options and its share price rises, it eventually must redeem the options either by issuing new shares -- which dilutes the ownership stake of existing investors -- or by repurchasing stock in the open market, which drains cash from the corporate treasury.
But as long as companies didn't have to recognize options as an immediate expense, the awards functioned as a "buy now, pay later" compensation plan.
"It's a tremendous tool for recruiting, motivating and incenting employees," said Kim Gibbons, a spokeswoman for San Jose-based Cisco Systems Inc. At Cisco, which opposes the FASB ruling, all employees get stock options, Gibbons said, and 80% of them are held by workers below the rank of vice president.
If forced to expense options, some companies said, they simply wouldn't provide options to as many employees as now receive them.
Expensing options "would vastly curtail the capability of small firms to offer stock options as an employee recruitment, retention and incentive tool," Karen Kerrigan, chair of a small-business advocacy group, said in remarks to a House committee this month.
David M. Blitzer, chief strategist for Standard & Poor's, estimated that the rule change would cut reported earnings for S&P 500 companies, the nation's biggest and best-known firms, by 6% or 7%. The biggest effect would be on technology firms, he said, followed by financial services companies.
It is uncertain whether a drop in reported profits would hurt companies' shares in the stock market. Blitzer thinks it could, but others on Wall Street believe that the market has had plenty of time to prepare itself.
"For a lot of our member companies, it's a big yawn," said Colleen Sayther, president of Financial Executives International in New York, an association of corporate financial officers.
Over the last two years, about 500 U.S. companies, including General Electric Co., Eastman Kodak Co. and Coca-Cola Co., have voluntarily begun treating stock options as an expense. That trend is continuing: On Monday, retail giant Circuit City Stores Inc. said it had begun to count options costs against earnings.
A number of these companies are now issuing stock to employees in place of options, with some strings attached.
