Financial rule to jeopardize employee stock incentives - discount store employees

Discount Store News, April 18, 1994 by Ken Rankin

I remember the sense of excitement that ran through the S.S. Kresge organization years ago when Harry Cunningham's dream of a national discount store chain was gradually becoming a reality.

The people in those old red front Kresge stores had more than a rooting interest in the success of the Kmart concept--they had a significant financial stake in the operation, as well.

Because of Kresge's employee stock ownership program, many of the chain's managers and other veteran employees owned a share of their company's future.

As a result, the success of the Kmart concept produced substantial rewards for many Kresge employees during the 1960s and '70s. That was fitting because the dedication, loyalty and productivity of those same employees contributed significantly to the success of Kmart.

Today, however, the ability of chains like Kmart to motivate employees by offering them a share in their company's future success is in real jeopardy.

The problem: a controversial revamp of corporate accounting standards that discount industry leaders say will effectively wipe out employee stock option plans at many retail chains.

The change under consideration at the Financial Accounting Standards Board (FASB) would require discounters and other companies to reduce their after-tax earnings by an amount equal to the "fair value" of corporate stock options granted to employees. Advocates of this change contend that such a requirement is needed to close the current loophole that allows top corporate executives to reap unwarranted, multimillion dollar stock windfalls.

In the discount store industry, where chains have long used stock options to attract talented job applicants, motivate employees and instill a sense of ownership among store-level personnel, FASB's plan could have a distinctly different effect.

According to a recent IMRA member survey, two out of three publicly held chains now offer stock option compensation to store-level employees, not just senior corporate execs.

And virtually every one of these companies told IMRA that FASB's proposed accounting standard would jeopardize the existence of their broad-based stock option plan.

"Many stated that the most likely consequence would be scaling back the plans to include only senior executives and to eliminate the stock options for the store-level employees," IMRA told Congress. This is "exactly the opposite result of what is sought by most critics of stock incentive plans."

Mass merchants that continue to offer employee stock plans under the new accounting rules may find it increasingly difficult to maintain current expansion plans.

According to IMRA, "the likely results [of FASB's rule] will be reduced stock prices and increased costs for capital as charges to earnings reduce profits." The upshot: fewer new stores, slower industry growth and fewer new jobs created by discount retailers.