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Stock Option Gravy Train Is Facing

The tide in Washington may be turning against executive options, now that Greenspan has blamed their accounting treatment in part for the fall of Enron

By Staff Writer | Updated on April 01, 2002

Never mind the conventional wisdom that Republican control of the White House and the House of Representatives should augur an era of business-friendly government. The time may be riper than you think for a little pendulum swinging when it comes to stock options.

Between the collapses of the stock market, tech sector and economy and, now, the Enron Corp. scandal, the public is becoming somewhat disenchanted with the so-called entrepreneurial wealth creators that it worshipped for much of the past decade. And savvy politicos haven’t missed the turning tides. Recently, stock options attracted the withering glare of Federal Reserve Chairman Alan Greenspan, who took the occasion of testifying before the House to wag a finger at the Financial Accounting Standards Board for its “unfortunate” 1994 ruling allowing firms to account for stock options with mere footnotes to financial statements, rather than take a direct hit to earnings. The practice not only caused management to focus almost exclusively on short-term earnings growth, he sighed, but also further pumped up an already inflated equities market. “We estimate that over the period 1995 to 2000, almost three full percentage points of the average annual gain in earnings resulted from the fact that stock options, rather than cash, was used as compensation amongst our major corporations,” he told the House Financial Services Committee on Feb. 27. “This undoubtedly had an effect on accelerating earnings.”

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