Merrill Lynch & Co analyst Steven Milunovich estimates that losing the benefit would cut technology companies' cash flow an average of 50 percent. The profit growth of companies in the Standard & Poor's 500 Index for the three period through mid-2000 would have been 9 percent annually instead of 11 percent annually, according to analysts at Bear, Stearns & Co.
More than 80 percent of financial analysts and fund managers say stock options are compensation and should be recognized as an expense, according to a survey conducted in November by the Association for Investment Management and Research.
Companies argue that the value of options is hypothetical, based on the Black-Scholes option-pricing method.
Investors would have to rely on a fictional measure that might misstate the options' true value, said Caroline Graves Hurley, director of tax policy at the American Electronics Association.
The group represents 3,500 companies, including Dell Computer Corp, Intel Corp and Microsoft. It helped defeat a similar bill in 1997.
"This has been talked about for years and years," said James Schneider, Dell's chief financial officer. "The question is how you actually booked this into your P&L," or profit-and-loss account.
Technology lobbyists argue companies would award fewer stock options under the plan, making it harder for companies early in their growth cycle to compete for workers with more established rivals that can afford higher cash salaries.
Reducing stock-based compensation may also make employees less responsive to investors, said Ray Hirsch, head of technology stock investing at American Express Financial Advisors.
"I kind of like it the way it is," he said. "It puts employees in the same box with the shareholder."
Warren Buffett called current accounting "Alice-in-Wonderland" stuff in his annual letter to shareholders three years ago. Buffett typically eliminates option plans when his Berkshire Hathaway Inc acquires another company.
"If compensation isn't an expense, what is it?" Buffett asked in the letter.
"And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?"
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