The notion of requiring companies to record the option awards to their employees as an expense if the company deducts them for tax purposes has been around for years but has always stalled in the face of intense lobbying, mainly from technology companies.
Two bills in Congress have revived the possibility that companies would have to include options as an expense on their income statement. That change would have an effect on earnings per share well beyond the tech sector. 
How heavy would the damage be? Applying the changes to banks 2001 results produced earnings-per-share reductions of as much as 18%, according to one analysts work on the topic.
Currently, companies can choose to ignore a 1995 accounting standard that calls for recording the fair value of an option as an expense when the option is granted. Most go a different route, following guidelines that require them to charge the intrinsic value the difference between the exercise price and the stock price when it is granted as an expense.
Since most companies set the exercise price equal to the stock price, options rarely show up as an expense. The most noticeable impact occurs when options come into the money, and the companys share count goes up.
According to a report released by Lehman Brothers bank team last week, those banks that would feel the biggest pinch from a change in the accounting requirement range from $693 billion-asset J.P. Morgan Chase & Co. to $4.1 billion-asset Silicon Valley Bancshares of Santa Clara, Calif.
Morgan Chase would have shaved 30 cents off its 2001 operating earnings per share, or 18%. Silicon Valley would have cut operating EPS by 25 cents or 14%. And $25 billion-asset Zions Bancorp would have reduced its EPS by 30 cents or close to 10%. (Its possible to get these estimates because if a company chooses not to include the cost of the option as an expense when it grants it, it still must provide details about what proforma earnings would look like if it had.)
Though these banks are all over the map, both literally and in terms of size and business, one thing they have in common is the use of options for incentive compensation.
Morgan Chase, for instance, reported that it had 195 million in outstanding options last year. Silicon Valley reported that it had 5.17 million outstanding options at yearend.
Silicon Valley chief financial officer Lauren Friedman said employee ownership is a key part of how the bank operates. These plans have long been an egalitarian compensation incentive, not relegated to the upper echelons of management but offered throughout the rank and file, effectively distributing the wealth a company creates, she said in a statement to American Banker Thursday.
Its important to note that a select few have already adopted Financial Accounting Standard 123, which requires companies to report the cost of options in income.
Wayzata, Minn.-based TCF Financial Corp., for instance, has been using FAS 123 since last year, when it stopped issuing options in favor of common stock grants.
The $11.4 billion-asset banking company, whose top three executives are all certified public accountants, prides itself on its simple approach to banking. So its fitting that executives view current alternative methods for stock-based compensation accounting as bad accounting.
Grants for stock and options are going to be an expense sooner or later, said TCF Financial spokesman Jason Korstange. Wed rather expense it the year that we grant them than wait until the future.
To be sure, the drive to include options as an expense affects banks in only a marginal way. The push for stricter options standards has mostly focused on technology companies, which tend to conserve cash but give employees potentially lucrative incentives.
Bear Stearns & Co. says that companies in its equipment/semiconductor, computers/networking, and communications equipment group would take the biggest blow to operating income from expensing stock compensation 43%, 29%, and 17% respectively on the basis of 1999 earnings.
Bert Ely, a consultant who supports any rule change that would make options-based compensation less appealing, said, Relatively speaking, this is less of an issue for financial firms. And since banks have less of their employee compensation tied to options than other industries, he said, I dont think this a top-drawer issue for them.
But analysts say banks and other companies should get ready for a change. Lehman Brothers chief political analyst, Kim Wallace, said in the report that regulators such as the Securities and Exchange Commission could act before legislation passes.
