Will Cox Delay Option Expensing?

Fred WhittleseyPay and Performance: The Compensation Blog0 Comments

(originally published as a Practice Alert at www.naspp.com prior to his confirmation)The resignation of William Donaldson as Chairman of the Securities and Exchange Commission (effective June 30) and the timely nomination of Christopher Cox as his replacement has caused speculation about the fate of FAS 123(R). Congressman Cox is on record as being a staunch opponent to option expensing.

The 6-month delay decreed earlier this year by Chairman Donaldson was viewed by most merely as additional planning time to address the inevitable change. Yet some companies interpreted this as a harbinger of a defeat of the new rule, and the change in leadership at the SEC has added another reason for those firms to extend their “wait-and-see” thinking regarding compensation planning priorities.

Chairman Donaldson and some of his predecessors have observed, however, that opinions and viewpoints held prior to taking the helm of the SEC often change after assuming that role. In time we will see whether Congressman Cox’s opposition to option expensing will find a fast track or will be rethought. Regardless of the outcome, we believe it would be unwise to table current equity compensation planning efforts for several reasons:

  • Hundreds of companies, representing the majority of U.S. equity market capitalization, have adopted FAS 123 and many of those have significantly altered their compensation plan design. The resulting impact on market compensation practices could not be unwound for many years.
  • If FAS 123(R) was nullified, there would be significant technical accounting issues required to achieve consistent reporting among companies. The timeline for this likely would be in years rather than months during which time companies that have adopted FAS 123 will continue to operate under the “level playing field” it creates for alternative long-term incentives.
  • If option expensing was eliminated we still might find that a change in perspectives has occurred over the past few years regarding the impact of non-cash compensation expense. The FAS 123 era may have permanently softened resistance to forms of equity-based compensation that create expense – restricted stock and restricted stock units, performance shares, and similar instruments may be deemed less “costly” after the past 10 years of analysis and reconsideration.
  • The FASB and SEC cannot avoid addressing global pressures for fair value accounting for share-based payments. With the International Accounting Standard Board’s (IASB) International Financial Reporting Standard governing companies across the globe, an American about-face on this issue would be contrary to Congressman Cox’s stated concerns about the status of US capital markets in the world economy.
  • Finally, FAS 123(R) is only one, and arguably a less significant, influence on current compensation re-design efforts. If APB 25 returned as the law of the land tomorrow, investor pressure, corporate governance trends, the movement toward pay-for-performance and other factors would continue to keep companies focused on alternatives to stock options.

Whether FAS 123 continues on its current timetable; or option costs get moved from the income statement to the balance sheet as the Chairman-appointee has previously proposed; or stock options again become “free” under APB25, the changes in compensation strategy and design that have occurred over the past few years have a momentum fueled by diverse forces and are unlikely to be reversed. Companies should not discontinue the assessment of total compensation strategy based on a multi-disciplinary approach in light of all financial perspectives – financial reporting, taxation, cash flow, value creation, dilution, corporate governance, and marketplace practices.

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