Can stock compensation accounting accomplish anything that disclosure can't?

• Author: Goodwin, Bradford S.
• Position: Executive Compensation in the Spotlight

The complex issues surrounding accounting for stock compensation have been debated without resolution for years. The most recent revival of the debate, focused on whether stock options should be counted as employee compensation on a company's income statement, began in late 1991 when Michigan Senator Carl Levin introduced the Corporate Pay and Responsibility Act. If Senator Levin's bill had passed, it would have required the Securities and Exchange Commission to require public companies to account for stock options in their financial reports.

In early 1992, SEC Chairman Breeden asked Chief Accountant Schuetze to work with the FASB to determine if a change in accounting for stock compensation is justified. And then, in October, the SEC issued sweeping new proxy statement disclosure rules for executive compensation that require, among other things, the valuation of stock options through the use either of an option pricing model or of hypothetical future stock price appreciation of 5 percent and 10 percent compounded.

At its meeting in November, the FASB proposed to account for employee stock options using an option pricing model that would take into account such factors as volatility and the expected term of the option. The bottom line of the FASB's proposal is that it would charge 30 percent to 70 percent of the value of the underlying stock to a company's earnings over the vesting period as compensation expense. And it would treat "broad-based stock plans" no differently than any other fixed-stock plan.

A number of organizations and individuals, including the Business Roundtable, Financial Executives Institute's Committee on Corporate Reporting, three of the Big Six accounting firms and many biotechnology and high-technology business leaders, have argued strongly against the FASB's proposal. A pivotal issue underlying the arguments for and against the proposal is the question of disclosure versus accounting.

No one questions the need for adequate disclosure. Investors should understand and evaluate the policies corporate compensation committees follow in deciding executives' compensation and benefits, including their stock compensation. And for investors who want to relate the amount of the executives' stock options to the company's performance, the SEC's new disclosure regulations include a provision that would give investors all the information they need. I think, in short, the SEC's new rules provide the information investors need.

But I...