A proposal to give shareholders veto power over stock option plans at publicly traded companies is generating a heated debate and facing a tenuous future now that a key proponent, Securities and Exchange Commission Chairman Arthur Levitt, is less than a month from retirement.

Levitt has asked the

National Association of Securities Dealers

, which owns the

Nasdaq

, to adopt the type of rule proposed by the

New York Stock Exchange

that would require companies to seek shareholders' blessing before awarding employees options grants.

The new restriction, Levitt has argued, would keep the large options grants that companies increasingly are including in pay packages to lure and retain workers from diluting overall share value at the companies. The concern is that employee stock options, often priced well below the market price for securities, drive down the market price when employees exercise them.

But opponents of the plan, including some tech companies, say a shareholder-approval requirement will hamstring them in a competitive job market where skilled high-tech workers demand a premium.

The

NASD thus far has received more than 100 comments on the proposal and has extended the comment period until Feb. 5. Nasdaq itself hasn't yet taken a position on the idea.

Final Act

But Levitt, who is set to leave his post by mid-February, has made the shareholder issue one of his last initiatives.

"It is shareholders' money that officers and directors are using to pay themselves," Levitt said during an address last month to an audience at the

New York Federal Reserve

. "Shareholders should not be diluted in the dark. I urge you not to miss the opportunity to comment."

But requiring shareholder approval for employee stock option plans would be akin to requiring a public vote on individual elements of national defense spending, says Anthony Muller, chief financial officer of

JDS Uniphase

(JDSU)

, the California fiber-optic communications systems manufacturer. High-tech firms need the flexibility to offer compensation like stock options to employees without the yoke of a shareholder vote, Muller said.

"I think it would be really good for lumber companies and paper companies, and really bad for high-tech companies," he said of Levitt's proposal. "Institutional investors are really not in a position to be informed and spend a lot of time looking at this."

As it is now, neither Nasdaq nor the NYSE requires its listed companies to seek shareholder approval for stock option awards to employees if those awards are part of "broadly based" plans that apply to a large percentage of the companies' employees. But the NYSE has proposed a far stricter requirement that would force its listed firms to obtain shareholder approval for any stock option plans that include officers or directors. The proposal also would require a vote on most stock option plans for other employees, except new hires.

Erosion of Rights

Institutional investors have pushed for a greater say over employee stock option awards.

"At the same time that stock-based incentive programs have exploded in popularity and potential cost, shareholders find that their rights to review these programs have diminished," the

Council of Institutional Investors

, a Washington, D.C., trade association, claims on its

Web site. "The Council of Institutional Investors is extremely concerned about the erosion of shareholder rights in this area."

The

National Center for Employee Ownership

, an Oakland, Calif., nonprofit group that monitors employee compensation trends, estimates that 7 million to 10 million employees out of the 110 million people in the nation's private-sector workforce now receive some sort of stock option grant as part of their pay. The group's executive director, Corey Rosen, says requiring shareholder approval for general employee stock options plans shouldn't be an undue burden for companies, as long as the requirements are flexible enough that they don't create logistical headaches for firms.

"It would make companies think through their plans," he says. "I really don't think it's a huge issue."

Rosen says executive stock option awards certainly should be approved by shareholders, especially since those often fall outside the scope of normal employee compensation.

"When you make $50 million a year, it's hard to call that compensation anymore," he says.