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Published: Saturday, 10/16/2004

Many companies already treating options as expense

Three years ago, only a handful of companies accounted for their executive and employee stock options as quarterly expenses.

Now dozens of very large companies have gone the options-expensing route, as have hundreds of smaller firms.

Each is apparently resigned to new accounting rules that have been in the works for a decade. Locally one public company, Health Care REIT Inc. of Toledo, began expensing its options last year. Officials of other firms say their boards could act to do so at any time.

Nearly 30 percent of the 250 largest companies in the Standard & Poor's 500 list have adopted options-expensing, proposed by the Financial Accounting Standards Board, according to a study released this week by Frederic W. Cook & Co., a management-compensation consulting firm based in New York.

The much-debated and often-delayed expensing rule was postponed once more this week after pressure from regulators and business groups. It is now slated to take effect in the third quarter of 2005.

"It's under review right now," said Gary Corrigan, spokesman for Dana Corp. Most companies expect the accounting standards board to require options expensing, he said. The board establishes standards for financial bookkeeping of publicly traded firms nationwide. It began pushing for expensing options a decade ago. The movement gained steam after the collapse of Enron Corp. in late 2001. Enron executives pocketed hundreds of millions from options gains even while the energy firm was going down the tubes. Other corporate scandals added impetus to expensing.

Proponents argue that options create an obligation that dilutes share value for other stockholders. Critics counter that many companies depend on options as a necessary means of compensation, especially technology firms that may take years to produce meaningful revenue and profits.

Companies may either expense their options on an ongoing basis or account for them in footnotes of financial reports. To date, most have opted for the footnotes.

Kevin Thompson, chief financial officer for Sky Financial Group Inc., said the banking company has studied the issue. If it had expensed its options last year, the change would have affected profit by just 2 cents a share, he said.

That's the case for most of the 21 public companies in northwest Ohio and southeast Michigan. Their latest filings with the U.S. Securities and Exchange Commission show that per-share profit would have been reduced by 1 cent to 11 cents last year, and even less this year, if they expensed options.

Options are a bigger deal for some firms than others. Last year, for example, exercise of long-standing stock options accounted for the lion's share of total compensation for Paul Ormond, chairman and chief executive of Toledo's Manor Care Inc. - $10.8 million of his $16 million package. But even though the firm awarded options to hundreds of employees, the net effect of expensing would have been about $9.5 million, or 11 cents a share, out of earnings of $119 million, or $1.31 a share.

CEOs of the other 20 area firms cashed in about $3 million worth of options as part of $22 million in compensation. The 21 firms reported a total of less than $40 million in options costs last year, about a tenth of 1 percent of their revenues.



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