Although it is an article of faith within our community that stock options are a key ingredient to the success of the New Economy, Congress has only recently begun to appreciate the importance of stock options to companies and – by extension – the growth of our economy.
While the use of stock options is well known in Washington in terms of enriching individual entrepreneurs and high-tech workers, a remarkably inept and uninformed action taken by the Labor Department last year mobilized the industry to educate Congress and other policy makers on the ubiquity of stock options and their use in motivating workers and building companies.
This activity threw a spotlight on the issue at an opportune time. Legislation expanding the use of stock options had just been introduced. And although time ran out in the congressional session this fall before further action could be taken on the bill, it generated a great deal of interest and bipartisan support, and had progressed further along the legislative process than many had anticipated. This legislation, and other important, related bills, will be reintroduced early next year and will be well positioned for further action.
Labor Department’s Misstep Brings Issue into Focus
In 1999, the Labor Department issued a compliance letter to an individual company regarding their use of stock options. The letter went largely unnoticed by the broader business community until it was determined that little stood in the way of the department applying its compliance order more broadly. The letter placed stock options and other forms of equity participation programs for non-exempt workers in jeopardy by requiring employers to recalculate overtime pay based on profits realized when an employee exercises the stock options.
Responding to this threat, the National Venture Capital Association helped form a business coalition, which immediately went about the task of explaining to members of Congress and officials in the Administration and the Labor Department that the effect of complying with the department’s letter would force companies not to offer stock options in the first place. Accordingly, it was explained, the letter’s effect on the economy would be nothing short of disastrous.
The alarm bells set off were quickly heeded by Congress. A bipartisan coalition of Senators and Representatives drafted and passed legislation in a matter of a couple months to rectify the situation. The legislation amended the Fair Labor Standards Act to exclude any value or income derived from stock option programs, stock appreciation right programs and Employee Stock Purchase Plans from nonexempt employees’ regular rate of pay for the purposes of calculating overtime.
Legislation Gains Traction
Armed with a better understanding of stock options issues, a congressional committee began to review the Wealth Through the Workplace Act, a bill introduced by Rep. John Boehner (R-OH). The legislation would create a “super stock option” for regular employees that would allow them to defer all taxation on their stock options until the shares are sold, making it easier for workers to use their options to build long-term wealth and retirement security. Upon exercise of these options, the option value would be deductible to the sponsoring employer. In order to qualify to offer a super stock option, employers would have to offer the new option to at least 50% of their workers.
This legislation was unanimously passed out of one committee and was being reviewed by another committee when time ran out in the congressional session. Considering how slowly the wheels turn in Congress – especially on new legislation covering a relatively unfamiliar issue – the Act made excellent progress.
Another bill, introduced even later in the session, would provide employers a strong incentive to offer a broad-based stock options plan while simultaneously providing employees an equally strong incentive to invest in stocks. The Universal Employee Stock Option Act, introduced by Representatives Amo Houghton (R-NY) and Robert Matsui (D-CA), would allow employees to use pre-tax payroll deductions – similar to a 401(k) plan – to exercise their stock options. The benefit plan would be open to all full-time workers and employees would only pay tax on the options – at regular rates based on the stock’s exercise price – when they are sold. For employers, the measure grants a deduction for the full fair market value of stock bought by an employee.
Both bills will be reintroduced when the new Congress convenes next year. The fact that considerable interest has been generated in this legislation during the congressional session that just ended is a testament to Congress’ increasing understanding of the issues of the new economy. Progress has been made, but there is still a long way to go.
NVCA has been on top of these issues, working with key House members to advance these bills through the legislative process and to educate members and staff on the importance of stock options in the new economy. As NVCA staff begin their legislative work next year, they will be calling on our community to support their efforts through letter writing campaigns and other grass roots lobbying efforts.
With the high-tech industry booming, the economy in its longest sustained expansion in U.S. history, and with more interest than ever in the venture capital industry among the public, we stand in a position to make a significant impact on Congress with regard to their understanding of venture capital and its importance to the economy. We must not hesitate to take advantage of this opportunity.
Howard Cox is a General Partner of Greylock in Boston, and serves on the NVCA Board of Directors. He is Chair of the Board’s Capital Formation Committee.