Employee Stock Options Would Be in Limelight Under New Rule

The Securities and Exchange Commission is nearing approval on a new measure that would require publicly traded companies to disclose annually the amount of stock options they issue to employees.

The agency is due to close the comment period early next month on the proposal, which it introduced in January in response to growing concerns that employee stock options programs dilute shareholder value.

But last week, the SEC enacted an exemption that eliminates one burden for such stock option plans. The change allows companies to reprice stock options for certain employees without having to offer that same deal to all employees. The change to a 1979 SEC rule gives companies greater flexibility to let certain employees exchange their stock options for new options at a lower price. Companies had been requesting the authority to selectively reprice options among their employees, excluding executives, for example, said Michael McAlevey, deputy director of the SEC's Division of Corporate Finance.

"Given that this is in a compensatory environment, we understand why [they] are trying to do that," McAlevey said. He added that the rule was ripe for updating, because when it was passed, "it wasn't a world where lots of shareholders held stock options."

The concept of repricing employee stock options has attracted increasing attention lately amid the market's big slide, which has left employees with options at strike prices well above the actual market prices -- or in other words, worthless. But repricings are tricky, because companies that do them may have to report the transactions as a hit to their earnings.

Realistically, the new SEC exemption isn't likely to tangibly affect most companies, since few are repricing employee stock options, said Corey Rosen, executive director of the National Center for Employee Ownership, an Oakland, Calif., nonprofit that monitors stock option developments.

"I don't think you'll see a stampede," he said. "There are a handful of repricings, but not many."

But Rosen welcomed the SEC's proposal to force firms to disclose the extent of their employee stock option programs.

The disclosure measure nonetheless stops short of calls by some, such as former SEC Chairman Arthur Levitt, to require shareholder approval for employee stock compensation plans. That type of requirement is still under consideration by the Nasdaq Stock Market.