GE Will Treat Stock Options as an Expense

The backlash against employee stock options, the perk that made executives fabulously rich during the stock market bubble, gained momentum Wednesday when General Electric Co. said it would count them against earnings for the first time.

GE, the nation’s most valuable company, said it would start treating options as a cost this quarter to bolster the integrity of its accounting, and some analysts said GE’s stature could prompt waves of other companies to follow suit.

Coca-Cola Co. two weeks ago became the first major company to count options as a normal business expense in reaction to the corporate bookkeeping scandals sweeping the country. A few others adopted the practice, including Amazon.com Inc., but most companies balked at the idea, saying it would significantly reduce their profits. Before July, Boeing Co. and Winn-Dixie Stores Inc. were the only members of the Standard & Poor’s 500 that did so.

With powerful GE expensing options, however, “the dam should break at this point” in terms of other companies matching the move, said Robert Friedman, an analyst at Standard & Poor’s Corp.

“That’s because GE is in so many different business lines, and they’re in finance as well as manufacturing,” he said. The conglomerate, with a total stock market value of $314 billion, also stands as a benchmark company whose management practices are often emulated by other enterprises, he said.

But Arthur Bowman, editor of trade publication Bowman’s Accounting Report, said GE by itself probably would not be able to make the practice widespread. Technology companies, the most aggressive in granting incentive options as compensation in the last decade, are particularly reluctant to treat options as a cost and lower profits.

Giant companies such as Intel Corp. and Oracle Corp. have defended current practices, arguing that the volatility of tech stocks makes it hard to place a future value on options. Semiconductor equipment maker KLA-Tencor Corp. went so far as to consider removing Coca-Cola vending machines from its San Jose campus “as a symbolic gesture” of disapproval of Coke’s decision.

Still, if the change is adopted by more major U.S. companies in the weeks ahead, “then maybe investors will pressure the rest of them to do the same,” Bowman said.

Employee options give holders the ability to buy a company’s stock at a set price in the future. The hope is that the stock’s market price will not only reach the option price but go even higher so the options are more valuable.

Executives are the major recipients of options, enabling them to collect tens of millions of dollars in profits in some cases, though many companies issue them to employees across the board in lieu of bonuses or raises. But the grants are under attack for contributing to the scandals, on the premise that wayward executives tried to boost share prices with accounting tricks to enrich themselves.

Fairfield, Conn.-based GE, which earned $13.7 billion on revenue of $126 billion last year, said expensing options would shave this year’s profit by about $30 million, or a penny per diluted share. The company--which makes power turbines, medical equipment, appliances and jet engines and owns a huge financing arm and the NBC television network--expects to earn about $1.65 a share this year.

The company said the cost would rise to 3 to 4 cents a share over the next three to four years as the options’ total cost is phased in. After the announcement, GE shares rose 60 cents to $32.20 on the New York Stock Exchange.

GE, under new Chief Executive Jeffrey Immelt, is sensitive about accounting matters these days. After the Enron Corp. debacle, GE was criticized for not providing enough information about its far-reaching activities. GE responded by releasing much more financial data and holding its first conference call with analysts.

GE said Wednesday that Immelt and Chief Financial Officer Keith Sherin also signed sworn statements certifying GE’s results--as government regulators now require--and GE took other steps to “further align senior management’s personal interests with the long-term interests of shareowners.”

Among them: GE will require senior officers to hold stock they have bought under its option program for at least one year before they can sell those shares on the open market.

Separately, the accounting industry’s rule-making body said it would consider whether companies that adopt the options-as-expense method should also restate financial results for options granted since 1995. The proposal will be considered at the meeting Wednesday of the Financial Accounting Standards Board, though no decision is expected, said spokeswoman Sheryl Thompson.

The board applauds companies such as GE and Coke because treating options as a cost, it said, “is the preferable approach” to showing investors the effect of options on financial results.

*

Bloomberg News was used in compiling this report.