The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here is something that GMI’s Paul Hodgson recently blogged:

In a press release last week, Sen. Carl Levin, D-Mich., and Sen. Sherrod Brown, D-Ohio, announced that they had introduced legislation to end tax breaks for stock options. Since they are considered performance-related pay, stock option expense is subject to corporate tax relief under Section 162(m) of the IRC. However, the tax relief is given on the actual expense of the stock options, based on the profits made by the executives at the time the options are exercised. This, Sen. Levin and Sen. Brown have discovered, is a much larger figure than the expenses recorded in company accounts, which estimates the cost of the option at its grant date. This differential, the senators claim, is a huge corporate tax break, and closing the loophole would net the Treasury about $25 billion.

This is priceless information and an eye-popping piece of legislation and there are almost too many conclusions here for one little blogger to deal with.

– If this is true, companies are seriously underestimating the costs associated with stock options, thus bamboozling shareholders and the markets.

– If this is true, companies are seriously underestimating the amount of pay being granted to their executives, thus bamboozling everyone.

– If this is true, I was right all along in insisting that the SEC use the amount recorded as profit as the proper record of pay for executives, even though it ignored me.

– If this is true, virtually every other pay survey – apart from ours – is not just wrong but seriously underestimates the amount of pay that executives receive.

But the real doozy is left to the end, in the summary of the bill. Just read this:

– make stock option deductions subject to the existing $1 million cap on corporate tax deductions for compensation paid to top executives of publicly held corporations.

In other words, stock options will no longer be considered performance-related pay under Section 162(m). That’s fine by me. I never thought market-priced stock options should be in the first place. Of course, there should be exceptions – premium-priced options, index-linked options, performance-vesting options. But if this went through this would be the death knell of the market-priced option for all but the smallest companies which aren’t affected by the $1 million cap anyway.

And no bad thing either.