- The Washington Times - Saturday, February 9, 2002


The Enron scandal is sparking calls for major changes in one of the best perks that businesses offer: employee stock programs. But some warn that the reforms hold dangers for companies and workers alike.

Proposals from Congress and the White House could limit how much company stock an employee could have in a 401(k) retirement plan.

Others would change laws regarding when employees could diversify the company stock in the tax-deferred retirement savings program.

And still others would place new limits on stock options, and could even require corporate executives to give back options proceeds if their companies have to restate earnings or engage in misleading accounting.

Millions of workers could be affected in thousands of companies, ranging from corporate behemoths such as Coca-Cola Co. Inc. to Silicon Valley start-ups.

"The trend line of all the proposals are in essence to restrict company stock," said Michael Keeling, a lobbyist and president of the ESOP Association, which represents about 1,200 companies that have employee stock ownership programs. "It's a big, big deal."

About 19 percent of all 401(k)s contain company stock contributed by employers or purchased by employees, according to the research group National Center for Employee Ownership. About 10 million workers, ranging from high-paid executives to entry-level factory workers, get stock options.

Lawmakers want to protect employees from the same fate as about 15,000 former Enron Corp. employees. Those workers lost an estimated $1.2 billion when the stock that made up the bulk of their 401(k) accounts plummeted as the Houston-based energy giant's accounting scams came to light and it filed for Chapter 11 bankruptcy protection.

"We want to make sure that the life savings of our nation's workers are protected, even when an employer's stock collapses," Sen. Barbara Boxer, California Democrat, said in introducing one of an estimated 18 post-Enron proposals that involve company stock programs.

At the same time, lawmakers and others are trying to prevent the types of executive stock abuses that occurred at Enron from happening again.

Some proposals, for instance, would prohibit company executives from exercising stock options during "blackout" periods when rank-and-file employees can't sell company stock held in their 401(k) plans. During a blackout period at Enron, when the company was switching pension plan administrators, most employees were not allowed to sell their plummeting stock, even though top executives could.

Most business interests don't deny there is a need for reforms of 401(k) and stock programs. But many say Congress could do more harm than good.

Letting employees diversify their 401(k)s by selling company stock, for instance, could strain small, privately held businesses. Because their stock isn't publicly traded, they would have to come up with the cash to buy the employees' stock.

Limiting the amount of company stock that employees could have in their 401(k)s, meanwhile, could prompt some companies to cut back on their matching contributions.

Restricting stock options and other stock-based incentives to protect employees from investment risks could hurt employee recruitment and retention programs, especially at technology companies that rely more heavily on company stock for employee compensation.

At semiconductor giant Intel Corp., stock is a major recruiting tool in a business that depends on highly skilled, hard-to-find engineers. Every Intel worker gets stock options, and company stock is a big part of every employee's compensation package.

"We would obviously be monitoring anything [that came out of Washington] very closely," said Intel spokesman Tom Beerman.

John Palafoutas, a senior vice president and lobbyist for AeA, the nation's biggest technology trade group, starkly described the potential harm if stock regulations are changed too much.

"What you'll do is force the best workers out of the industry," he said. "You'll have the threat of damaging the ongoing technology growth of this country."

Companies big and small have used employee stock incentives since at least the 19th century. Most are in the form of employee stock ownership programs, or ESOPs, or are connected with 401(k)s or similar employee savings plans.

Companies say stock helps foster workers' loyalty and encourages them to make decisions with shareholders' interests in mind. It is also cheap compensation compared with cash. And at least for now, there are corporate-tax benefits that come with company stock programs.

Enron and a few other examples aside, there have been few major cases where employees have been badly hurt because of their employer's stock programs, business advocates say. In 1995, the Department of Labor found that fewer than 1 percent of employee stock ownership plans filed for bankruptcy.

Not counting Enron, "I defy anyone to find a significant block of people who ended up in poverty because of their investments in their own company's stock," said Mr. Keeling.

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