GSA Corporate Governance

GSA Summary Position

The GSA strongly opposes legislation and accounting changes that would treat broad-based employee stock options (ESOs) as an expense. GSA believes that there is no accurate methodology for valuing ESOs and that expensing options would distort profitability and mislead investors.

If expensing is enacted through legislation or by accounting changes it would negatively affect the generous distribution policy of fabless companies and result in fewer ESOs granted to non-executive employees, thus eliminating the most potent form of employee motivation used to encourage employees to take the necessary risk required for innovation.

Additionally, the Association also believes that expensing ESOs would put U.S. fabless companies at a competitive disadvantage with the burgeoning group of semiconductor companies in Mainland China and Taiwan.

Overview of Major Position Points:

• The technology industry, specifically the fabless semiconductor industry, has been disproportionately responsible for job and wealth creation for the U.S. economy over the last decade. The creation of small companies that develop breakthrough products is a critical factor in moving the U.S. economy in a stable and healthy direction.

• The broad distribution of stock options establishes the risk/reward ratio necessary to attract key talent. This tool is vital to the entrepreneurial spirit of small- to medium-sized companies. Younger, growing companies use options to offset risks for employees when they join these nascent companies. However, profitability is also essential to pre-IPO and public companies. The broad distribution of ESOs to non-executive employees would be curtailed if it were to affect profit. And if the generous use of options to motivate talent is reduced, this would stifle innovation and U.S. economic growth.

• It is impossible to place an accurate value on an option in the year that it is granted because it may be exercised for some unknown price at an indeterminate time, or may not be exercised at all. The options granted to employees are not tradable; frequently have contractual lives of up to 10 years; typically vest over four years; and an employee must continue employment to maintain rights to those options. Expensing stock options could misrepresent their economic cost in financial statements.

• Emerging economies recognize the value of equity incentives and will continue to use them competitively to the United States' disadvantage. If the United States adopts punitive accounting rules for expensing options, the U.S. fabless semiconductor industry will be less competitive with the Taiwanese and Chinese industry, where stock grants are a regular part of the compensation package to virtually all employees. Mainland China and Taiwan are becoming increasingly competitive in the semiconductor arena with the number of fabless companies in these areas proliferating. There are reportedly more than 250 companies in Mainland China and Taiwan. Asian emerging economies have very progressive stock plans for high-tech employees. If the practice of rewarding employees with stock continues in these areas, while retreating in the United States, it could place the U.S. semiconductor industry at a serious competitive disadvantage.