Hewlett-Packard Shareholders Vote to Expense Options

Updated from 5:31 p.m. EST

Hewlett-Packard ( HPQ) shareholders approved a proposal at the company's annual meeting Wednesday to expense stock options.

Shareholders cast 1.2 billion votes in favor of the measure and 921 million against.

The options expensing measure was put forth by the Massachusetts Laborers' Pension Fund, which owns 87,100 shares of H-P stock. The pension fund quoted comments in favor of expensing options from Warren Buffett and Alan Greenspan. Greenspan once said companies' reluctance to expense options has created a "significant distortion in reported earnings."

In 2003, H-P's net income of $2.5 billion would have been reduced $762 million to $1.8 billion if the company had expensed options using the fair-value method. Annual earnings would have been cut from 83 cents to 59 cents.

Critics complain that options grant programs drain corporate cash flows by forcing companies to buy back their own stock to offset dilution from options issuance.

H-P had opposed the move to expense options, invoking the standard line among opponents of expensing that options are difficult to value accurately.

The debate is to some extent symbolic, since the Financial Accounting Standards Board is expected to begin requiring companies to expense options on their income statements starting in 2005.

However, tech stalwarts, including Microsoft ( MSFT), Amazon ( AMZN) and Dell ( DELL), have already made reforms to appease critics of generous options programs.

In September 2003, Microsoft did away with options handouts altogether, instead giving employees stock as an incentive (the stock will be recognized as an expense). Amazon has largely shifted to using restricted stock and other forms of stock-based compensation.

Dell pledged that it would roughly halve its options grants for fiscal year 2004.

Wednesday's vote at H-P in favor of expensing options is striking given that last year the company's shareholders voted down a similar proposal.

H-P shareowners showed their activist streak on an unrelated issue in 2003, though, when they passed a compensation reform proposal. That measure, a reaction against a $26 million severance package awarded to former president Michael Capellas, urges the board to seek shareholder approval for any severance package worth more than 2.99 times a senior executive's base salary plus bonus.

For the options expensing measure to go into effect, it would need to be approved by H-P's board of directors. "We will continue to carefully debate the matter," said spokesman Brian Humphries.

In regular trading, H-P shares rose 33 cents, or 1.5%, to $22.12. After hours, the stock rose a penny to $22.13.

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