Sun, Jun 15, 2003 page11

• Intel, Dell may give fewer options, more cash as pay

  PERFORMANCE-BASED The two tech companies are lobbying the US Congress in a fight against mandatory expensing, which some feel will stop shady accounting

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  Dell Computer Corp will pay executives with more cash, and Intel is studying whether to give stock grants, after both were criticized for awarding options for more than 500 million shares in the second half of the 1990s.

  Intel, the world's biggest computer-chip maker, said in a US Securities and Exchange Commission filing that it may raise the amount of performance-based cash it pays to workers and replace options with stock grants.

  Dell, which boosted executive bonuses, will halve the number of stock options issued this year, chief financial officer James Schneider said in an interview.

  Companies are reevaluating their use of stock options as accounting regulators consider requiring firms to deduct the estimated cost of stock options from earnings. Investors have criticized the role of options in inflating results. The earnings Intel and Dell reported during the past year would have been more than 30 percent lower had options been expensed.

  "Clients are already pulling back on options," said Matt Turner, a compensation consultant with Mercer Human Resources Consulting LLC in Seattle. "We are doing a pretty brisk business this year."

  He declined to disclose his clients.

  Software maker Computer Associates International Inc and Internet retailer Amazon.com Inc have already begun to expense options, joining AT&T Corp, Ford Motor Co and at least 130 other US companies that have switched since the start of last year.

  Investors such as Warren Buffett and policy makers including Federal Reserve Chairman Alan Greenspan call options a hidden expense that distorts financial statements.

  Siebel Systems Inc investors rejected a proposal yesterday urging the business software maker to record employee stock options as a cost.

  They also voted down a second shareholder proposal requesting that certain performance measures be met before workers could exercise their stock options.

  Intel and Dell still are fighting mandatory expensing, even as they consider alternatives. Both belong to the International Employee Stock Options Coalition, a lobbying group supporting bills to delay listing options as an expense.

  Intel chairman Andy Grove and chief executive Craig Barrett have written editorials opposing the proposal.

  Intel chief financial officer Andy Bryant told a US Senate roundtable last month that requiring companies to expense options is akin to "asking me to commit perjury."

  CFOs would be asked to certify financial results distorted by inaccurate estimates of option costs, he said.

  Vanguard Group founder John Bogle has ridiculed that argument. Last June, he said "a lot of accounting is based on estimates" such as calculating depreciation on equipment or valuing a contract to deliver products in the future.

  Shares of Santa Clara, California-based Intel rose US$0.25 to US$22.14 at 4pm New York time in NASDAQ Stock Market trading.

  Round Rock, Texas-based Dell rose US$0.31 to US$31.94.

  The companies opposing the change are unlikely to prevail, lawmakers and analysts said.

  In 1994, accounting standards rulemakers voted that options should be treated as an expense. Congress convinced the group to back down after lobbying by computer-related companies. This time, the chairmen of the two congressional committees with jurisdiction over the issue don't plan to hold hearings, leaving the decision to the accounting group.

  Intel assumes expensing will be required. Barrett said four weeks ago the US accounting standard setter, the Financial Accounting Standards Board, is fixed on making the change.

  "Clearly, FASB has ruled and they want to implement it," Intel spokesman Bill Calder said. "You have to assume that will proceed."

  Options give a holder the right to buy stock at a set price in a set period. Options gained favor in the 1990s because companies didn't have to account for them as a cost, unlike shares awarded based on performance.

  Options also provided tax benefits by letting companies deduct from corporate income taxes the exercise of stock options by workers.

  Even without the expensing requirement, companies are looking at new ways to reward workers because many options awarded in the 1990s can't be exercised profitably after US shares dropped the past three years.

  Intel is considering attaching time and performance conditions to grants of stock or options, the company's SEC filing said. The chipmaker also is evaluating whether more cash pay should be tied to performance and may hand out indexed options, which carry an exercise price linked to a market index.

  The company said at a shareholder meeting last month that it won't make any changes for now. It is continuing to look at compensation and hasn't decided what changes will be warranted if it's required to deduct the cost of options, Calder said.

  "The companies I have spoken to have been diligent and have already modeled out the precise size of grants for after the change," said Matt Ward, chief executive of Westward Pay Strategies Inc, who declined to specify which clients consulted him. "Any companies with more than US$1 billion in revenue, I've got to figure they had someone internally modeling, if not used their consultants to do that."

  Semiconductor maker LSI Logic Corp said in a filing that it's asking shareholders to approve a plan allowing the company to change compensation "if and when option expensing is required."

  LSI didn't return calls for comment.

  In lieu of options, Dell executives will be entitled to cash bonuses of as much as US$6.9 million each in fiscal 2007, assuming performance goals are met. Spokesman T.R. Reid said the company is giving fewer options to workers because the labor market is less competitive than it was in the late 1990s.

  Amazon.com Inc, the world's biggest Internet retailer, replaced options with restricted stock as its "primary vehicle for employee stock-based awards," the company said in a filing.

  Companies won't abandon stock options wholesale, consultants say. Options have become ingrained in the computer industry and so will remain as a "cultural vestige," Turner said.

  "Right now, 60 to 65 percent of all employees in high tech have options," Turner said.

  "That might fall below 50 percent, but not much lower than that," Turner said.

  Microsoft, the world's biggest software maker, wants to continue awarding stock to employees and hasn't decided what it will do if expensing is required, chief financial officer John Connors said in an interview. He said he expects options to remain at many companies.

  "An equity-based program that is broad-based for all employees makes a great deal of sense," Connors said.

  "You'll probably see companies in the tech sector continue to have an option program that's important," Conners said.
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