An Enron ‘Elixir’ Would Try to Cure What Doesn’t Ail Us

A wag once said that for every challenge, there is a solution that is simple, straightforward--and wrong.

Unfortunately, that seems to be the case in the congressional response to the Enron collapse. And the worst example of a wrong solution to Enron is the Levin-McCain bill on stock options.

Proposed in the Senate by Michigan Democrat Carl Levin and Arizona Republican John McCain, the bill would require the stock option tax deduction to be reflected as an expense on a company’s income statement, reducing reported profit. It would have the harmful effect of limiting the use of stock options, a form of employee ownership, for all but the most senior executives.

Levin-McCain takes away the incentive for companies to encourage employee stock ownership, a practice that Congress and other provisions of federal tax law have tried to promote. Never mind that the tax on stock options is paid by the individual employee who receives the benefit and usually at a higher rate than the company would pay. If either the financial or tax costs of offering stock options to employees is increased, as happens with Levin-McCain, companies will be forced to limit option grants.

A 1999 study by the human resources consulting firm William M. Mercer found that 17% of large public companies offer stock options to most or all of their employees. Although it is mostly associated with technology and Internet companies, the practice goes well beyond. Warehouse stores, publishing houses and restaurants offer this popular benefit, which has allowed employees at even the lowest levels to benefit from the hard work they contribute to their employers. Levin-McCain would effectively end it in publicly traded companies and many private companies as well.

Why? Levin-McCain is being touted as an elixir to cure the problems caused by Enron. But stock options are not what brought down Enron and caused thousands of employees to lose their retirement savings. The collapse of Enron is entirely unrelated to the method of accounting or taxation of stock options. The Enron debacle was caused by improper accounting for special-purpose entities and corporate policies relating to how much company stock should be invested in employees’ 401(k) plans--issues having nothing to do with stock options.

Levin-McCain is not only bad for stockholders and employees; it harms companies and innovation as well. The bill would create less accurate financial statements and thus would deprive investors of the accurate information needed to judge a company’s performance. Finally, Levin-McCain would limit the ability of companies to take deductions when stock options are exercised and therefore effectively would raise taxes on those companies. Employee stock options are widely used by many small and medium-size businesses, the engine of growth for the economy. Thus, stock options are directly linked to strong job growth.

Levin-McCain is an attempt by Congress to leverage the emotion and real hardship elicited by Enron’s failings in order to clamp down on the benefits industry can bestow on its employees. And nobody--not companies, not employees--will be better off.

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Harris N. Miller is president of the Information Technology Assn. of America, based in Arlington, Va.