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It's time to take a sober view of stock options



Published: Mon, March 31, 2003 @ 12:00 a.m.



St. Louis Post-Dispatch: Stock options are like red wine. A little bit is good for the system. Guzzle too much and dangerous things happen. For example, the numbers on a company earnings report get fuzzy.

America's executive suites hosted an options bacchanalia in the late 1990s. The resulting wild behavior was a big cause of the corporate scandals still rocking the nation.

Congress and the Securities and Exchange Commission have gone a long way toward imposing honest sobriety in corporate financial reporting over the past year. The need to limit stock options is the largest piece of unfinished business.

The obvious way is to force companies to reflect the true cost of the options in their profit reports. Do that and the average large company could see its profit drop 10 percent. Rather than face shareholder wrath over slipping earnings, companies would slash options.

The Financial Accounting Standards Board, which sets accounting rules, seems on a path toward requiring just that. Its chairman, Robert Herz, favors the proposal.

But there are grumblings from members of Congress who want to keep the good times rolling for the company executives who fill campaign coffers. A bill in the House would delay the move for at least three years. A group of senators wants it studied to death by the SEC.

Moderation

A stock option is the right to buy a stock sometime in the future at today's price. A big rise in the stock price means a big payoff for executives with options. That's why options are OK in modest amounts. They align managers' interests with shareholders.

The problem is that companies piled options onto their managers in the 1990s. By 2000, about 60 percent of chief executives' compensation was linked to the share price.

That created tremendous pressure to juice up the earnings. When the numbers didn't cooperate, greedy executives tweaked them. The stock price rose. Executives cashed out. Shareholders were left holding the bag when the truth finally surfaced.




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