Expensing Stock Options Jeopardizes Competitiveness

Dec. 21, 2004
Intel Corp.'s Craig Barrett says stock options stimulate employees to benefit shareholders.
Craig R. Barrett, CEO of Santa Clara, Calif.-based Intel Corp., has been very vocal about expensing stock options. An opponent of the practice, he feels the current expensing method -- Black-Scholes -- is far from accurate. He goes as far as saying that if Microsoft, Cisco or Intel had used Black-Scholes over the last few years, the companies would have incurred expenses of over $3 billion per company for options that may never be exercised.IW: Why is Intel against expensing stock options? Barrett: One reason is that it is a transfer of ownership in the company that has been approved by the shareholders as a non-cash transaction. The shareholder effectively says that by sharing ownership of the company 'I agree that employees can increase the size of the pie faster than if I don't share with them.' It's a little bit like when you add a partner to a law firm . . . under the assumption that that new partner will bring new business to the firm and therefore increase the size of the pie. Last time I saw, most law firms don't take an expense charge when they take a new partner. Point two, I think it will have a dampening impact on entrepreneurial activity and the growth of technology/knowledge-based industries in the Untied States. I don't think [other countries] are going to expense options, so we are going to be at a structural disadvantage there. And third, as a CEO of a major company with 30 years of management experience, in my estimation stock options are one of the great competitive weapons the United States has to participate in the world economic infrastructure. I would hate to see us put a dampening impact on options through some artificial expensing scheme such as Black-Scholes. IW: Intel shareholders voted on recommending stock-option expensing and it narrowly failed. Explain what you intend to do to restore investor confidence? Barrett: It was a close vote, but only about one-third of the people voted for expensing. I don't think we are necessarily in the game of restoring investor confidence in Intel. I don't think we've lost the confidence of our investors. But we are doing a number of things from the standpoint of clarifying our stands and actions in corporate governance. We've taken stands that chairman and CEO ought to be separate positions. We are a proponent of broad-based stock-option programs and are on record as saying that corporations that use stock options should use them in a broad-based fashion. Broad-based in our definition is less than 5% of the options granted on an annual basis ought to go to the senior executives of the company. In fact, we typically run in the 2% range. IW: What is different about tech companies and stock options? Barrett: We use stock options to stimulate our employees to use their knowledge to benefit the company and to benefit our shareholders. There is a difference in the nature of our business, the nature of our structure from the more classic industries where they don't rely on the intellectual prowess of their employees -- we do. I would also point out that I think the future of the world's economy is more dependent on the Microsofts and the Ciscos and the Intels of the world than it is on the Berkshire Hathaways of the world.

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