I've been spending some time, over the past few months, arguing against
the mandatory expensing of stock options, which FASB is proposing to
require in the very near future.
I travelled to Washington at the end of March to meet with a number of congressmen and women as part of the AeA's Stock Option "Fly-In", wrote a letter to the Director of FASB (see text below), and even got interviewed for a couple of snappy articles by TheStreet.com's K.C. Swanson: Workers Give Up Get-Rich Dreams, Still Value Stock Options and Silicon Valley Loses the Keystone of a Golden Age.
If you feel as strongly about this issue as I do, I'd encourage you to go to SaveStockOptions.org and do your bit to help!
Subject: File Reference No. 1102-100
From: Jeff Solof
Date: Thu, 27 May 2004 10:15:21 -0400
I am writing in regard to file reference number 1102-100, to
express my strong opposition to the mandatory expensing of stock
Stock options, which are broadly distributed at Sun Microsystems --
over the past five years, 87% of all options have been granted to
employees below the rank of Vice President -- provide a number of
powerful benefits to the company and its shareholders. They incent
entrepreneurial behavior: my options are only valuable to the extent
that the company grows and prospers, which means that all my efforts
are directed to this end. They incent long-term commitment: because
they vest over a five-year period, I am much more interested in
sticking with the company over the long-haul, versus flitting from
employer to employer based on the best short-term compensation package.
Particularly in volatile economic times, their long-term potential
balances the short-term risk particular companies, like Sun, face in
particular industries, like high-tech. Stock options keep me in my
seat, working hard for the company's long-term benefit -- which, in
fact, aligns my interests 100% with those of our shareholders. Stock
options make this company my company, and its success, my success.
There is no more powerful tool to accomplish this. (To the suggestion
that shares of stock, rather than stock options be granted: shares of
stock have value whether the company prospers or fails to prosper.
Stock options, conversely, have no value unless the company grows.)
Some have written to you, I am sure, describing how much stock
options mean to them personally. The stories of
secretaries-turned-millionaires are heartwarming, I'm sure. But what do
my personal interests mean to you, to Sun shareholders, to tax payers,
to the citizens of our country? What should they mean? In this free
market economy, not much. What is important to all of these
constituencies, however -- what is absolutely vital -- is the economic
competitiveness of our country, and our country's high-tech industry,
which represents the leading edge and engine of our economy. Mandatory
expensing of stock options will make otherwise profitable companies
appear unprofitable to the average investor. Capital will flee to
global competitors who are not required to treat options as an expense.
And as global competitors will be able to provide much more compelling
long-term incentives to employees, particularly in the high-tech
industry, where stock options have been a staple for many years, our
best and brightest talent will sign on to work for them rather than for
the US companies which, heretofore, have been at the head of this
vitally important, strategic industry. We've seen manufacturing jobs
leave our shores; high-tech jobs will follow en masse if others can
offer long-term incentives we no longer can.
I am also quite concerned as to the methodology you are proposing
for calculating stock option-related expenses. To give you one example
from my tenure at Sun, my first two option grants, in the spring of
2000, were originally projected to be worth $138,000 and $144,000,
respectively, after five years. Specifically, I received 3,000 options
at a strike price of $46, and 3,600 options at a strike price of $40.
Sun used an estimated projection of 15% compound annual growth rate in
the stock price to show a doubling in share price over the course of
the five year vesting period, which resulted in these values. Today,
our stock price is hovering around $4 per share, and it's unlikely that
these options will ever be worth anything before they expire at the end
of eight years. So what is the right way to expense them? At $282,000?
At $0? With no facility for true-ing up the actual value of the options
when they're exercised, this attempt to provide financial transparency
will in fact make financial statements more arbitrary and disconnected
from reality. The reality is, in fact, that stock option grants
represent a dilution of shareholder value -- which dilution is
currently reported as it should be, rather than treated as a hard
I understand your desire to provide this additional transparency --
and would assert that this is the wrong way to accomplish this goal.
And I certainly understand your desire to prevent more egregious
episodes of executive greed and malfeasance. But I would assert that
requiring the expensing of broad-based stock options is again, the
wrong way to accomplish this goal. And that it will hurt our high-tech
industry, our national competitiveness, and the shareholders of our
companies, whose interests are best served by a highly-talented
workforce whose interests are 100% aligned with their own.
I ask you to withdraw or substantially modify your proposal to address these issues, and thank you for your consideration.
Jeffrey R. Solof
Jeff Solof Sun Microsystems, Inc.
Director, Editorial Office 1 Network Drive, MS UBUR02-203
Global Communications Burlington, MA 01803-2757
direct: +1 781 442-0224 internal: x20224
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