Federal securities regulators have approved for the first time a market-based method for putting a value on employees’ stock options, a move that could reduce the erosion of companies’ bottom line by allowing smaller values to be assigned to the prized perks.
Public companies must count the stock options they award their employees against profits under rules that took effect last year — a mandate that can sharply reduce the reported earnings of many big companies, especially in the options-loving high-tech industry. A few companies have urged the Securities and Exchange Commission in recent years to approve various market-based methods for valuing options, as opposed to the academic models in force.
The SEC rejected those proposals. But now the agency’s chief accountant, Conrad Hewitt, has told financial services company Zions Bancorp that its auction system could be used to calculate market-based values for employee stock options.
“The SEC staff concurs with your view that the (auction system) is sufficiently designed to be used as a market-based approach to valuing employee share-based payment awards,” Hewitt said in a Jan. 25 letter to James Livingston, a Zions vice president.
The company, based in Salt Lake City, announced the SEC letter in a news release Tuesday. The development was first reported by The Wall Street Journal in Tuesday’s editions.
In its system, Zions created “tracking securities,” called employee stock option appreciation rights securities, that emulate the options it awards employees. The company sold them to sophisticated investors in an auction last June, providing a market value for the options based on bids received — which was only about half of that derived from academic models.
“We are thrilled to finally have this (SEC) letter in hand,” Evan Hill, another Zions vice president, said in an e-mail message Tuesday to The Associated Press. “This is great news for all option-granting companies. Companies can now have the market tell them what their (employee stock options) are worth.”
The SEC did attach some conditions to its approval of the method, including a requirement that the auctions be held on or near the date on which the stock options are granted to employees.
Stock options allow employees to buy shares of their company’s stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price — and pocket the difference.
Corporate America became roiled last year by a scandal over suspected manipulation of the timing of options grants to enrich top executives at numerous companies. More than a hundred public companies are under investigation by the SEC and federal prosecutors, and 18 CEOs have been swept out.
Most of the cases are said to involve backdating: Options are issued retroactively to coincide with low points in a company’s share price so recipients can sell their shares at higher market prices.