Will Expensing Cost The U.S. Jobs?
Thirty-five year chip industry veteran E. Thomas Hart plans on doing something unprecedented. At an upcoming monthly staff meeting, the chief executive of chip design company QuickLogic Corp. (QUIK ) will talk politics. Hart will urge more than 100 employees in Sunnyvale, Calif., to write members of Congress asking them to support bills that would put off rules requiring companies to expense stock options. "We're telling our employees that if this matters to you, you ought to stand up and be counted," says Hart.
Hart's appeal to his workers is part of a last-ditch lobbying effort by the tech industry to preserve options in their current form. Faced with an almost-certain ruling next year by the Financial Accounting Standards Board requiring companies to report the value of their options on their income statements, normally apolitical tech executives like Hart are backing an industrywide letter-writing campaign and trekking to Washington to talk to their representatives.
But forget about the arcane accounting technicalities that have dominated the debate so far. In the face of growing concern about sluggish job growth and outsourcing to Asia, tech executives have settled on a far more potent strategy: They're playing the jobs card. Make us expense options, they warn, and the already worrisome leaching of tech positions abroad will only accelerate -- even if the economy improves. As it becomes even more costly to employ American workers compared to their foreign rivals, tech execs say, workforce expansion will take place in low-cost countries rather than in the U.S. "I think it will impact whether we grow headcount again to the same extent in the U.S. or not," says John T. Chambers, CEO of networking giant Cisco Systems Inc. (CSCO ).
It's a bold, if long-shot, strategy. Investors, accountants, and governance experts firmly in favor of expensing aren't likely to be swayed. Linking jobs to expensing options amounts to little more than political "extortion," says Nell Minow, chairman of Corporate Library LLC, a governance consulting group in Portland, Me. She and others say that the debate shouldn't be muddied with issues unrelated to the accuracy of financial reporting. What matters is that options issued to employees have value and therefore they must be expensed. "The techie's argument is bankrupt," says Paul B.W. Miller, an accounting professor at the University of Colorado at Colorado Springs. "It's saying the only way we can maintain our competitiveness is through organized misrepresentations in our financial statements."
The all-out lobbying effort, though, has given rise to hopes within the industry that it can successfully change minds in Washington. A House bill that would delay the FASB ruling has attracted 108 co-sponsors. A visit by 30 technology CEOs to Washington in late September may have helped. Within weeks, one of the senators they visited, Michael B. Enzi (R-Wyo.), submitted a bill that would apply expensing rules only to stock options granted to the five top executives, not to rank-and-file employees. Enzi's proposal, which has so far attracted 10 co-sponsors, would also let newly public companies avoid expensing options for three years.
Enzi's compromise, though, doesn't have much chance of becoming law. Critics have pointed out the difficulty -- and intellectual inconsistency -- of expensing options for only one class of employee. And more than two dozen senators already are on record urging FASB to stick to its guns. Many are mindful that Congress just gave FASB the go-ahead to set accounting standards as part of the Sarbanes-Oxley Act reforms, so lawmakers would look foolish if they changed their tune now. Nor does FASB show any signs of backing down. "Investors want expensing. Joe Sixpack has been sending us unsolicited letters demanding that we close this loophole," says a senior FASB official.
WILLING TO COMPROMISE
Even so, the prospect of expensing has set off a frenzy of tech industry lobbying. Earlier this year, luminaries such as Intel (INTC ) CEO Craig R. Barrett descended on Congress. And the emergence of the Enzi bill has set off a new wave. The American Electronics Assn. plans to lobby Senate and House staffers during the winter break and will bring 30 more technology CEOs to the Capitol in March. Industry execs say that they're willing to compromise and aim to find a method of valuing options that won't devastate their earnings.
Their hope is that legislators will begin to identify the stock option expensing debate with the employees whose jobs could be lost, rather than with greedy CEOs who feathered their nests with options in the go-go 1990s. An August survey by the AEA showed that public high-tech companies on average grant stock options to 84% of their employees. Microsemi Corp. (MSCC ), an Irvine (Calif.)-based chip company that hands out options to 25% of its workforce, says an adverse options ruling could affect its hiring. Already, about 20% of 1,600 employees are in Asia. Predicts Chief Financial Officer David R. Sonksen: "This will drive more technology development offshore."
Tech execs may have a hard time convincing lawmakers that options expensing will make a big difference in their hiring decisions. Already, companies such as Oracle (ORCL ), Hewlett-Packard (HPQ ), and Cisco have hired extensively in India in search of cheap talent. That march will no doubt continue -- no matter what the outcome of the options debate. Still, playing the jobs card in an election year is likely to get the attention of lawmakers a lot faster than arguing the merits of the Black-Scholes model for pricing options. That's why it's still too early to count out the anti-expensing lobby just yet.
By Steve Hamm in New York, with Amy Borrus and Mike McNamee in Washington