GOP backs options for all, with tax breaks

A leading Republican in the House of Representatives insists employees should get tax breaks on company stock options so they’ll hold them longer and have more invested for retirement.

Rep. John Boehner testified before a House subcommittee earlier this month about a bill he introduced in November that would create a new kind of stock option — one that would not be taxable to employees until they sell their shares. Once taxed, it would be at long-term capital gains rates rather than higher ordinary income tax rates.

The Ohioan spoke before the House Education and the Workforce subcommittee on employer-employee relations, which he heads. His Wealth Through the Workplace Act largely has bipartisan support.

taxed now at purchase

Currently, employees must pay capital gains tax when they exercise company stock options on the difference between the stock’s market price and the exercise price. That “forces many to sell the shares immediately upon exercise,” Mr. Boehner said.

“This means many employees have to give up long-term appreciation in the stock. It also means that for many, the effectiveness of the option as a team-building incentive expires as soon as the option is exercised,” he said.

Other Congress members and officials of start-up and large companies also testified that the bill would link employee compensation to their company’s performance.

“People respond better, and I think they perform better, when they have a stake in the outcome” of their companies, said Rep. Robert Andrews, D-N.J., the subcommittee’s ranking minority member and author of a bill similar to the one discussed at the hearing.

Employers also would be able to take a tax deduction for the increased value of the stock option when it is exercised by employees. Employers currently are allowed to do that for some types of options that are typically awarded to senior executives.

The administration has no position on the legislation, says Labor Department spokesman Luis Rosero. The department has a proposal under discussion that would force companies to include options in overtime-pay calculations, which some worry would discourage giving employees stock options.

more getting them

Their use is particularly prevalent in start-up companies, testified Patrick Von Bargen, executive director of the Washington-based National Commission on Entrepreneurship. Mr. Von Bargen said stock options used to be reserved for senior executives, but today they are used for a wider range of employees.

The National Center on Employee Ownership estimates that between 7 million and 10 million employees now receive them, up from 1 million in 1992. Their use is especially prevalent in hot sectors like biotech and computer-related businesses. A survey by his organization of venture capital-backed companies found that all of them offered options, he said.

“In addition to aligning the interests of shareholders and employees, options provide retirement security and build a sense of ownership among employees,” Mr. Von Bargen said. “And, we have strong evidence that the sharing of equity improves corporate performance.”

Jane Greenman, deputy general counsel of human resources for Honeywell Inc. in Minneapolis, who testified on behalf of the Association of Private Pension and Welfare Plans, said that 39% of major companies now have stock option plans that cover over half their work force, up from 17% in 1993, because they help employers recruit and retain employees. Honeywell reserves a specified number of shares each year for grants to outstanding non-executive employees.

She asked that the new stock options not be put under Labor Department regulation, partly because of of possible conflicts with Securities and Exchange Commission regulations.