`Special Treatment' of Stock Options Is a Charade, Says Harvard Business Review Article.

Business Editors

BOSTON--(BUSINESS WIRE)--Feb. 27, 2003

As the nation's top accounting standards body considers a change in the way companies account for stock options, three finance experts have denounced the current "special treatment" of options as economically indefensible. They say the case for expensing options is overwhelming and that contrary to opponents' claims, expensing will not hurt young companies.

In a nine-page analysis in the March issue of Harvard Business Review, Robert C. Merton, a Nobel Prize-winning economist at Harvard Business School, Robert S. Kaplan, a renowned accounting expert also at Harvard Business School and creator of the Balanced Scorecard, and Zvi Bodie, a professor of finance at Boston University, say that the current practice of relegating options to the footnotes of corporate reports distorts financial reporting and wrongly subsidizes options over other forms of compensation.

The authors say it's time to "end the charade" that stock options warrant such special treatment.

"It is not the proper role of accounting standards to distort executive and employee compensation by subsidizing one form of compensation relative to all others. Companies should choose compensation methods according to their economic benefits--not the way they are reported," they write.

The article appears as the Financial Accounting Standards Board is considering a rule change that would require companies to expense stock options. In January this year, the authors submitted an early draft of their article to FASB during the public comment period.

Merton, Kaplan, and Bodie examine and dismiss the key objections of opponents of expensing. They reject as "spurious" claims that options are already adequately disclosed and that expensing will amount to "double counting." Critics who make this case, say the authors, "are themselves creating a smoke screen to hide the income-distorting effects of stock options grants."

The authors also refute the claim that reporting options costs will hamper startups in their efforts to provide incentives and say there are better alternatives for helping out young companies: "A less distorting approach for delivering an accounting subsidy to entrepreneurial ventures would simply be to allow them to defer some percentage of their total employee compensation for some number of years."

For a review copy of "For the Last Time: Stock Options Are An Expense," contact Cathy Olofson at 617-783-7616 or [e-mail].