OPENING STATEMENT OF CHAIRMAN CASS BALLENGER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *

OPENING STATEMENT OF RANKING MINORITY MEMBER, MAJOR R. OWENS, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *

STATEMENT OF T. MICHAEL KERR, ADMINISTRATOR, WAGE AND HOUR DIVISION, EMPLOYMENT STANDARDS ADMINISTRATION, U.S. DEPARTMENT OF LABOR, WASHINGTON, DC *

STATEMENT OF ALAN A. NADEL, PARTNER, ARTHUR ANDERSEN, LLP, NEW YORK, NY, TESTIFYING ON BEHALF OF THE ASSOCIATION OF PRIVATE PENSION AND WELFARE PLANS (APPWP), WASHINGTON, DC *

STATEMENT OF J. RANDALL MacDONALD, EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES AND ADMINISTRATION, GTE CORPORATION, STAMFORD, CT, TESTIFYING ON BEHALF OF LPA, WASHINGTON, DC *

STATEMENT OF BETH MARTINKO, VICE PRESIDENT, HUMAN RESOURCES, MERANT, ROCKVILLE, MD, TESTIFYING ON BEHALF OF THE INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA (ITAA), ARLINGTON, VA *

STATEMENT OF ABIGAIL ROSA, SENIOR ADMINISTRATIVE ASSISTANT/ PARALEGAL, XILINX, INC., SAN JOSE, CA *

STATEMENT OF PATRICIA M. NAZEMETZ, VICE PRESIDENT, HUMAN RESOURCES, XEROX CORPORATION, STAMFORD, CT, TESTIFYING ON BEHALF OF THE U.S. CHAMBER OF COMMERCE, WASHINGTON, DC *

APPENDIX A-WRITTEN STATEMENT OF CHAIRMAN CASS BALLENGER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *

APPENDIX B-WRITTEN OPENING STATEMENT OF RANKING MINORITY MEMBER, MAJOR R. OWENS, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *

he Subcommittee met, pursuant to call, at 10:03 a.m., in Room 2175, Rayburn House Office Building, with the Honorable Cass Ballenger, Chairman of the Subcommittee, presiding.

Present: Representatives Ballenger, Barrett, Hoekstra, Boehner, and Owens.

Staff Present: Molly M. Salmi, Professional Staff Member; Robert Borden, Professional Staff Member; Rob Green, Workforce Policy Coordinator; Peter Gunas, Workforce Policy Counsel; Patrick Lyden, Professional Staff Member; Heather Oellermann, Staff Assistant; Deborah Samantar, Office Manager; Jo-Marie St. Martin, General Counsel; Michele Varnhagen, Minority Labor Counsel/Coordinator; Peter Rutledge, Minority Senior Legislative Associate/Labor; Maria Cuprill, Minority Legislative Associate/Labor; and Brian Compagnone, Minority Staff Assistant/Investigations.

Chairman Ballenger. A quorum being present, the Subcommittee on Workforce Protections will come to order. The Committee is meeting today to hear testimony on the treatment of stock options and employee investment opportunities under the Fair Labor Standards Act.

Under rule 12(b) of the Committee rules, any oral opening statements at the hearing are limited to the Chairman and the Ranking Minority Member. This will allow us to hear from our witnesses sooner and help Members to keep to their schedules.

Therefore, if other Members have statements, they can be included in the hearing record. Without objection, all Members' statements and other material referenced during the hearing will be inserted in the hearing record.

Chairman Ballenger. The Subcommittee is meeting today to examine the treatment of stock option programs and other so-called broad-based stock option plans under the Fair Labor Standards Act. I would like to take a moment to welcome our witnesses. We appreciate their willingness to take time out of their busy schedules to testify before the Subcommittee.

In a February 12, 1999 opinion letter that has only recently become widely publicized, the Department of Labor determined that under the 1938 Fair Labor Standards Act, at least in some cases, the profits from the exercise of stock options are part of an employee's regular rate of pay and therefore must be taken into account in determining the employee's overtime rate of pay. While the opinion letter constitutes the agency's interpretation of the law based on the facts and circumstances of one specific case, the practical effect of the letter is to "red flag" all other similar programs and cause widespread confusion about overtime liability among employers who provide stock options for their hourly or nonexempt employees.

Stock option programs can be configured in a variety of ways and be referred to by different names, but all of the programs share similar objectives: to reward employees, provide ownership in the company, and to attract and retain a motivated work force.

As we will hear from our witnesses, stock ownership programs are becoming available to more and more employees. In the past, such programs were used to reward executives, top management and other key employees. However, there has been a dramatic increase in the past several years in the number of companies offering broad-based employee ownership plans to rank-and-file employees.

I daresay that few employees who receive stock options from their employer consider the profit on those options to be part of their regular rate of pay for overtime purposes. Yet this interpretation by the Department of Labor that says that stock options may be part of the employee's regular rate threatens to undermine the ability and the willingness of employers to make stock options available to their nonexempt employees. I believe that the law should encourage, and not discourage, employers from including their hourly workers in employee ownership programs.

I look forward to a thorough and informative discussion today, and I appreciate the help and attention that many Members on both sides of the aisle as well as the Department of Labor have given to finding a workable solution. I hope that we will, in

fact, be able to work together on a solution so that we can make sure that Federal law does not end up discouraging the use of such programs and even denying employees the opportunity to participate in the success of their company.

WRITTEN STATEMENT OF CHAIRMAN CASS BALLENGER, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES- SEE APPENDIX A

Chairman Ballenger. I will now recognize Mr. Owens for his statement.

Mr. Owens. Thank you, Mr. Chairman. Let me apologize from the onset for the fact that an emergency will take me away for a short while, and I will return as soon as I can.

I want to welcome today's witnesses. I look forward to your testimony. This is a fascinating subject, and I will certainly read all the testimony that I am not able to hear. I read a good deal of it already.

I especially want to welcome Mr. Kerr, as this is your first opportunity to appear before us. Welcome to the hot seat, which is not so hot today.

The subject of today's hearing, whether or to what extent stock options should be counted for purposes of calculating overtime, raises very significant and important issues. I support employee ownership, and I agree that public policy should not act to discourage that end. However, I also strongly believe in the policies and purposes served by the 40-hour week. Permitting employers to disregard employee compensation when calculating overtime also serves to encourage employers to work fewer employees longer hours for less money.

It is my hope that the testimony of today's witnesses will be helpful in enabling us to determine how best to balance these two important policy goals.

Finally, I want to express my appreciation to the Department of Labor, to the business community, to organized labor and to Chairman Ballenger and my Republican colleagues for everyone's express intention to find common ground. That is my goal as well. As I said, these are crucial issues. I think it is vital that the conflicts between these important public policy goals be reconciled on a sound policy basis. I also think that the issues at stake are so important that we will not be able to address them unless we do so on a bipartisan basis. I look forward to working with all of my colleagues to achieve that end. Thank you.

WRITTEN OPENING STATEMENT OF RANKING MINORITY MEMBER, MAJOR R. OWENS, SUBCOMMITTEE ON WORKFORCE PROTECTIONS, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES– SEE APPENDIX B

Chairman Ballenger. Thank you, Mr. Owens.

Now I would like to introduce our panel of witnesses. Mr. T. Michael Kerr, Administrator of the Wage and Hour Division of the U.S. Department of Labor; Mr. Alan Nadel, Arthur Andersen, LLP; Mr. Randall MacDonald of GTE Corporation; Ms. Beth Martinko, MERANT Corporation; and Ms. Abigail Rosa, an employee with Xilinx. She and I were discussing the stock of her company. It is doing very well. Finally, Ms. Patricia M. Nazemetz from Xerox Corporation.

Let me remind the witnesses that under our committee rules, they must limit their oral statements to 5 minutes, but their entire written statements will appear in the record, and we will allow the entire panel to testify before questioning the witnesses. The lights are in front of you, the green light means you are safe, the yellow means that your time is running out, and the red means that it has run out. We will not hold your feet to the fire, but to get this done in a legitimate hour, that is what we will try to do.

With that said, Mr. Kerr, you may begin your testimony.

Mr. Kerr. Thank you very much. Mr. Chairman and Members of the Subcommittee, thank you for the invitation to appear today to testify about the relationship between employer-provided stock option programs for covered workers and overtime pay under the Fair Labor Standards Act. This is my first opportunity, as it was noted, to appear before the Congress as the Administrator of the Wage and Hour Division, and I look forward to working closely with you, Mr. Chairman and the other Subcommittee Members during my tenure.

As we all know, many changes in the modern workplace are affecting employers as they seek to meet changing business demands as well as changing employee expectations and needs. The need for new and innovative ways to attract and retain workers has taken on particular urgency for some employers because of the tight labor markets that we now face.

In this context, the Department does not want to discourage employers from developing and offering modified stock option programs for their employees. Stock option programs can benefit both employers and employees, and we certainly want to encourage these and other innovative ways of rewarding and empowering workers. At the same time, the Fair Labor Standards Act has been and remains one of the Nation's

most important worker protection laws. The act establishes basic minimum wage, overtime pay and child labor standards for our Nation. These protections are vital to the millions of workers covered, many of whom are on the lowest rungs of the economic ladder.

Among my more important responsibilities as new Wage and Hour Administrator is enforcing the Fair Labor Standards Act and advising the Secretary on the law's application and enforcement. A major aspect of that responsibility is to protect workers' overtime pay by preventing erosion, whether intentional or unintentional, of the regular rate of pay used to calculate overtime.

Having said that, let me also make clear that the Department has not ruled that stock option programs must always be reflected in overtime payments. Current interest in this issue derives from a February 1999 opinion letter regarding a particular program presented in the specific case that, as structured, did not meet the current exemptions provided for in the act.

Interaction between this important law and the relatively new phenomenon of hourly employees receiving stock options is what we have come here to discuss today. I believe that working together, we will be able to both protect the regular rate for employees and allow both employers and employees to continue to benefit from employer-provided stock option programs.

Generally, the Fair Labor Standards Act requires that all forms of remuneration for employment be included in the regular rate of pay for purposes of calculating overtime. However, the Fair Labor Standards Act also recognizes that there are certain kinds of benefits that employers should be encouraged to provide. This is why Congress wrote section 7(e) of the law, which specifically excludes employers' payments for benefits such as paid time off, bona fide savings or profit-sharing programs, health and life insurance, retirement programs, and certain kinds of bonuses from the overtime pay calculation.

In each of these cases, it was determined that the benefit itself was good for employers and employees, and excluding it from the regular rate would not undermine the basic purpose of the overtime requirement.

In light of the current interest in the stock options issue, and the Secretary's interest in promoting this innovative tool for both employers and employees, we have been looking at the broader policy questions regarding the interaction of stock option programs and overtime. As part of this effort, we have reached out to many sources, including employers which offer stock option programs, industry associations, organized labor, benefit groups, and trade associations.

Through these efforts we have sought to obtain information about how stock option programs are structured and used to help better understand how these programs could or should be treated under the Fair Labor Standards Act.

I would like to take this opportunity to say that we greatly appreciate the time and effort that all of these people inside and outside of the government have taken to help educate us about stock option programs.

Within the Department of Labor, we have followed three lines of inquiry. We have been assessing the extent to which stock option programs may qualify under the various existing 7(e) overtime exemption; we have reviewed how our regulations might be modified to address this issue; and we have explored with interested parties the development of a narrow, targeted legislative proposal confined to addressing this particular issue.

Based on the information we have been able to obtain, there appears to be wide variations in the scope, nature and design of stock option programs. There is no common model for a program, and this suggests the need for a flexible approach on behalf of all of us.

Given the wide variety and complexity of programs, we believe that the best solution would be to address this matter legislatively. In doing so, we believe we can be guided by the existing framework of the Fair Labor Standards Act which already addresses the interaction between overtime pay and other benefits provided in the workplace.

Our recommendation is to amend section 7(e) of the Fair Labor Standards Act to include bona fide stock option programs in the items excludable from overtime calculations. In developing such legislation, there are a number of issues we have been discussing among ourselves and with others outside the Department regarding bona fide stock option programs that could be helpful in ensuring that the important policy objectives and vital worker protections embodied in the FLSA overtime pay requirements are upheld.

Based on the information we have obtained and issues that have been raised through our outreach effort in the context of the purposes of the Fair Labor Standards Act, these issues might include, among others, whether the program is designed as a reward for past performance; whether participation in the program is voluntary; whether and what conditions are placed as a quid pro quo for receipt of this benefit; whether the terms and risks are fully disclosed to potential participants; the extent to which the terms encourage long-term savings and investment in the company; the depth of the discount; the relationship of the program to or its dependence on productivity, efficiency, and hours of work.

Mr. Chairman, I would again extend our offer to work with you, the other panelists and other people who are interested in this, the Ranking Member, and the other members of the Committee to develop an appropriate legislative solution. I believe that under the Subcommittee's leadership and the various parties, business, labor, the administration and Congress can work together to craft legislation that would be acceptable to all of us.

This concludes my prepared statement. I would be glad to respond to any questions later. Thank you.

WRITTEN STATEMENT OF T. MICHAEL KERR, ADMINISTRATOR, WAGE AND HOUR DIVISION, EMPLOYMENT STANDARDS ADMINISTRATION, U.S. DEPARTMENT OF LABOR, WASHINGTON, DC- SEE APPENDIX C

Chairman Ballenger. Thank you Mr. Kerr.

Mr. Nadel, you may begin your testimony.

Mr. Nadel. Thank you, Mr. Chairman, for the opportunity to appear before the Committee today. I am Alan Nadel, a partner with Arthur Andersen LLP, but I am here today representing APPWP, the benefits association where I serve as a member of the board of directors.

No longer just a prerogative of executives, stock ownership programs are increasingly part of the benefits package of nonmanagerial, unionized and hourly employees. Between 7 and 10 million nonmanagement employees now have stock options, and 39 percent of major companies now have option plans that cover over half of their work force, up from 17 percent in 1993. In fact, nearly 19 percent of all employees were eligible for option grants in 1999 as compared with 12 percent in 1998.

This growth includes a substantial number of workers who are nonexempt under the Fair Labor Standards Act. A 1998 survey found that 34 percent of companies with stock option plans made grants to nonexempt employees.

These broad-based stock programs enable workers to become corporate owners and can represent an important vehicle for accumulating wealth. Stock programs also contribute meaningfully to workers' retirement security and serve as an important recruitment and retention tool in today's very competitive labor market.

Employers use a variety of arrangements to achieve today's emphasis on broad-based stock participation: incentive and nonqualified stock options, employee stock purchase plans, stock appreciation rights and outright grants of stock.

Inclusion of nonexempt workers in stock arrangements is not limited to one form of stock option plan or even to stock options themselves. A stock option gives the employee the right to buy a share of stock in the future. Companies typically grant options at certain specified times and at a certain specified price, usually with a multi-year vesting period before any gains may be realized. Most companies make grants on a nonperiodic basis, but some make regular periodic grants, such as once every 12 months.

The majority of plans set the option price equal to the fair market value of the stock at grant date with a few providing a modest discount. The taxation of the stock purchase depends on when the employee ultimately sells the shares he or she has acquired.

The facts in the Department's opinion letter represent a fairly common stock option plan, and the letter's analysis does not depend upon anything specific to the particular option plan as opposed to other broad-based stock arrangements. Therefore,

many employers have reasonably concluded that the Department of Labor's determination regarding required inclusion of stock option gains in overtime is applicable to all stock plans reaching nonexempt workers.

APPWP believes this outcome is misguided. The Fair Labor Standards Act's requirements predate the emergence of broad-based stock arrangements, and so do not reflect a considered decision to include such programs in overtime. Stock options are more akin to benefit programs such as profit sharing, 401(k) and pension plans which are exempt from the Fair Labor Standards Act overtime requirements.

In practical terms, the Department of Labor letter makes it difficult to provide stock options to nonexempt workers. Employers would have to determine each employee's gain by looking at the specific option grant and exercise dates and the prices for the stock on those dates. They would then have to allocate such profits over the appropriate time period by matching weekly stock profits to weekly rates of pay.

The ruling would also produce additional uncertainty in employers' overtime costs, as these would vary with the stock option holding patterns of nonexempt employees. As a result, employers were not unwilling to make the unpredictable financial commitment that would accompany a broad-based stock plan. Workers with identical stock option grants, identical overtime hours, and identical productivity could have different overtime pay as result of exercising their options at different times.

Given the administrative, financial and employee relations burden imposed by the ruling, fewer employers would initiate stock plans for their rank-and-file employees, and those who currently sponsor stock programs would likely move to exclude nonexempt workers. This would reverse the very positive trend in the American workplace toward broad-based equity participation.

APPWP believes that it would be impossible to fashion a comprehensive regulatory remedy exempting stock plan gains from the Fair Labor Standards Act's overtime requirements. We are gratified that the Department of Labor has reached the same conclusion that we have, that a legislative solution is necessary. In our view, a legislative exemption must cover the diverse range of broad-based stock programs and include a safe harbor for existing plans that have been operating quite reasonably without including employee stock gains in overtime.

I want to thank you, Mr. Chairman, for your leadership on this important issue. We at the APPWP look forward to working with you, other Members of Congress, and the Department to advance bipartisan legislation that will maintain the trend toward broad-based employee stock ownership. I would be pleased to answer any questions you may have.

WRITTEN STATEMENT OF ALAN A. NADEL, PARTNER, ARTHUR ANDERSEN, LLP, NEW YORK, NEW YORK, TESTIFYING ON BEHALF OF THE ASSOCIATION OF PRIVATE PENSION AND WELFARE PLANS (APPWP), WASHINGTON, DC - SEE APPENDIX D

Chairman Ballenger. Thank you, Mr. Nadel. Mr. MacDonald.

Mr. MacDonald. Thank you, Congressman. My name is Randy MacDonald. I am the Executive Vice President of GTE and a Member of the Board of Directors of LPA. I am here today because in the last 4 years, we have given three periodic grants of stock options to 110,000 employees. When I first heard about the opinion letter, I have to be candid and tell you that I didn't understand what was going to happen, because it is real simple from my perspective: That the 53,000 people who would be hurt by this, the lower-paid hourly employees, the nonexempt employees in our corporation, really lose something. But we will continue to give it to the exempt employees and to overseas employees.

I think it is important for people to understand why we do this now. An example was that prior to this we used to have a stock purchase plan where you could go in and buy GTE stock for a 15 percent discount, but it caused you to take cash out of your paycheck. You had to pay to get the stock. We found that only 38 percent of our work force of the 110,000 people were participating. When we really looked into it, we really found that the higher-paid were participating. The lower-paid were not. So we stopped that, and we began to give periodic grants of stock options to a broad-based population within GTE.

Some interesting statistics: We have a direct correlation between overall satisfaction in GTE as a company to work for, and our stock price. The higher the stock price, the higher the satisfaction.

Chairman Ballenger. Understandable.

Mr. MacDonald. Interestingly enough, almost 75 percent of all employees now indicate through our surveys that they understand how it works, so we have done a good job of educating them as well.

On my way down here this morning, when I was flying down, for some reason I thought of Apollo 13. And if I may paraphrase the words of Tom Hanks, "Washington, we have a problem." If you think about Apollo 13 and what I am hearing amongst the Members as well as the administration and the Department of Labor is that that group of people, when they heard that they had a problem, they went out and solved it. They solved it and got those people back. I think that is what we are really trying to talk about today.

I think there are four points that you need to be aware of. One, I don't mean this in a threatening tone, I mean it in a very practical tone, is that we will discontinue providing stock options to nonexempt hourly employees if we are faced with the administrative burden of doing this.

Secondly, we do not want to inherit the liability that this would also entail for us. We have enough problems with ERISA liability, and I don't want to get into that. The bottom line is that we will discontinue it.

I think that, and I agree with Mr. Kerr, we do not need a narrow definition to fix this problem. I would implore Congress to think about a definition that fixes this legally, but is flexible and, more importantly, is forward-thinking. I think that is a real key issue here.

Third, unequivocally, it has to be retroactive to take that liability off the table. And, in addition to that, I would urge a real sense of urgency. This is a problem because there are an awful lot of companies, my peer companies, companies that I work with, who are stopping it now. This is proxy season, and we typically go out and ask the shareholders for more options for these programs. I know for a fact that these companies have stopped doing that until legislation is passed to fix the problem.

And last but not least, in a pure bipartisan way I don't think any of us are here to try to confuse this with other forms of FLSA reform. Just focus on this. That is all we are looking for is to focus on how to fix this problem.

In another terminology that some people feel is appropriate, in my mind this is a no-brainer. We have got to fix this. Thank you.

WRITTEN STATEMENT OF J. RANDALL MacDONALD, EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES AND ADMINISTRATION, GTE CORPORATION, STAMFORD, CT, TESTIFYING ON BEHALF OF LPA, WASHINGTON, DC- SEE APPENDIX E

Chairman Ballenger. Thank you, sir. Ms. Martinko, you may begin.

Ms. Martinko. Chairman Ballenger and distinguished Members of this Committee, it is truly an honor to testify before you on the topic of stock option grants under the Fair Labor Standards Act. I am Beth Martinko, Vice President of Human Resources for MERANT, a leading software company with annual revenues of almost $400 million. I am also here on behalf of the Information Technology Association of America, ITAA. MERANT is an active member of ITAA, and our CEO, Gary Greenfield, serves as Chairman of the Board of the Association.

My job responsibilities as Vice President of Human Resources include identifying and implementing programs including, but not limited to, stock option programs that will attract and retain the top talent in the software business. Prior to my current assignment in HR, I held a number of positions at MERANT, including worldwide technical support, customer education, customer consulting and general manager of the testing solutions area, so I think I bring a breadth of perspective, from our company anyway.

I cannot emphasize enough that stock options are the top compensation issue for most of the top talent in the software business. It is the major factor in hiring and retaining our key employees, and it is just barely behind salary in the negotiation process. When I joined the company almost 7 years ago, options were a benefit rarely offered below the executive levels. Now the exact opposite is the case. Technology companies have maximized the value of personal stake in their firms and, whenever possible, create pride of ownership by granting stock options to their employees.

Stock options are an impressive democratizing force within technology companies and within the new economy. In December of 1998, when our company was formed through the merger of INTERSOLV and Micro Focus, a broad-based option grant was issued to each of our approximately 2,000 employees worldwide. No U.S. employees received less than 500 options. One year later, when 25 percent of those options were eligible for vesting, they were worth over three times their original strike price.

MERANT is committed to rewarding the very dedicated work of all our employees, not just our executives, with wealth-building instruments such as options. We have created educated investors and employees with a true stake in our business, and every single employee is able to experience success when the company thrives.

One of our five company beliefs is: our team is our strength. The force behind our ability to deliver solutions successfully is the strength of our people. Working together multiplies our individual strengths for common goals. Only through a commitment to each other and to the team can we achieve success. In the software industry, the people are the business so employee retention is a huge leverage point for us in driving the company's success. Stock options are one of the key tools we have for that retention.

We currently have 138 nonexempt employees at MERANT with a U.S. work force of 1,113. This means approximately 12 percent of our U.S. high-tech work force would be affected by the recent Department of Labor ruling on stock options. Nonexempt workers are a very important part of our work force. They are the people at our front door. They are the people that ship our products. They are the people who are behind the scenes working to make sure that our company sticks together. They are often the frontline interface to our customers. For these reasons, it is more important than ever that these nonexempt employees be rewarded for their hard work and dedication to a business known for its lightning speed and long hours.

Looking at a hypothetical employee, I don't want to mention any specific names, but we will talk about Susan. Susan has been with MERANT since early 1997. She works as a sales administrator in our sales department. Among her responsibilities are

pulling the paperwork together for the sales orders, tracking down faxes and phone messages, and in general making sure that the sales operation works the way it should and our sales representatives can focus on our customers.

Susan makes roughly $26,000 a year. She received 500 MERANT stock options in December of 1998, 25 percent of which vested this last December. Because of the growth in our company's stock during this time, Susan was able to do a cashless exercise the week before her family's celebration at holiday time and have an additional $650 to take home to her family. That was a big week for Susan last December. And the best news is that that was only 25 percent of her total options. She still has 3 years to go to watch MERANT continue to grow and prosper, and Susan will share in our success.

As a result, Susan is even more focused on making sure those customer orders flow smoothly through her department, and if a customer needs any piece of information, she is likely to be standing over the sales reps's shoulder saying, did you get that yet? Get that done. We need to get that order closed.

Requiring companies to incorporate stock option valuations for the purposes of calculating overtime pay would be a payroll nightmare for our company. This practice would force us to keep tabs on which employee exercised options when, and then pay them retroactively for their overtime based on their pay at that time. Some options vest quarterly, some yearly, some monthly. This record keeping alone would be cumbersome, costly and prohibitive.

I would also like to point out that profit sharing and bonus pay are not required for overtime calculations. Why then single out stock options, a similar reward mechanism? When MERANT wants to recognize all employees for hard work that has led to success, like we did in December of 1998, we don't want to exclude anyone. All employees, not just executives, have to work the weekends and long evenings to produce that success.

The decision may have been inadvertent. This decision would have the effect of limiting those rewards at a software company like MERANT. My belief is that in the practical implementation of this decision, nonexempt employees would no longer be eligible for the same stock option benefit programs at a company such as MERANT.

Mr. Chairman, policy and legislative issues are not my specialty. Business growth and needs of leading high-tech companies are. I thank you very much for holding this hearing to reevaluate the decision to require companies to factor stock option values into overtime calculations. As the head of human resources at one of the world's leading software companies, and also on behalf of my 2,000 employees, I urge you to rethink this decision. Options are not always lucrative. Many times companies fail. But let those who succeed share the wealth with every worker on the payroll, not just the executives, because every worker contributed to that success. Thank you.

WRITTEN STATEMENT OF BETH MARTINKO, VICE PRESIDENT, HUMAN RESOURCES, MERANT, ROCKVILLE, MD, TESTIFYING ON BEHALF OF THE INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA (ITAA), ARLINGTON, VA- SEE APPENDIX F

Chairman Ballenger. Thank you, Ms. Martinko. Ms. Rosa.

Ms. Rosa. Thank you. Good morning, Mr. Chairman, and Members of the Committee. I am most pleased to be here and participate in this process this morning. My name is Abigail Rosa, and for approximately 3 years I have been a senior administrative assistant/paralegal as a nonexempt employee with Xilinx, Inc. Xilinx is a programmable logic company in Silicon Valley.

I have been working in the legal field for 29 years, and the majority of those years were spent working in a law firm environment. I left the law firm environment to move in-house due to the attractive benefits and compensation package many high-tech companies like Xilinx offers its employees. Some of these benefits include a stock purchase plan which allows me to purchase Xilinx stock at a market discount and participate in Xilinx's stock option plan.

I understand the issue today before this Committee is the Department of Labor's position concerning nonexempt employees and how our overtime pay is calculated. As much as I would love to receive overtime calculation based on stock option compensation in addition to my base pay, I don't believe companies like Xilinx could afford to do so on a long-term basis.

This issue concerns me greatly. Should companies be forced to calculate overtime pay on other compensation, nonexempt employees like myself could very possibly be facing companies doing away with stock options altogether for the nonexempt employees. That being the case, I would much rather have my overtime calculated only on my base salary and exclude calculation of stock option or stock purchase plan gains. Again, this is assuming that doing away with the stock options would be a likely response to a change in the law.

With these benefits, my husband and I hope to be able to afford to purchase a home within the next few years. As you may be aware, housing is outrageously high in the Bay area, and many nonexempt employees are excluded from this luxury.

Xilinx leads in programmable logic integrated circuits, and it is a publicly traded company which employs approximately 2,000 employees worldwide. Some Xilinx employees use stock benefits in a number of different ways. For example, a recent new program encourages employees to donate the purchased shares through a company stock purchase program to local schools and other charities. Other employees use vacation time to build housing for the poor or give up their lunch hour to read or tutor ESL children in local schools, a program which I am involved with on a weekly basis.

Though I only speak for myself, I suspect that most nonexempt employees would rather have stock option plans available to them, instead of running the risk of losing the benefits.

I truly appreciate the opportunity to be able to participate in Xilinx's stock purchase plan and would appreciate serious consideration by this Committee regarding the implementation of any changes that may jeopardize the benefit to nonexempt employees.

Mr. Chairman and Members of the Committee, thank you for your consideration and invitation to attend this hearing.

WRITTEN STATEMENT OF ABIGAIL ROSA, SENIOR ADMINISTRATIVE

ASSISTANT/ PARALEGAL, XILINX, INC., SAN JOSE,CA- SEE APPENDIX G

Chairman Ballenger. Ms. Nazemetz.

Ms. Nazemetz. Thank you. I, too, thank you for the opportunity to testify here this morning on the subject that is of great importance to all employees at Xerox, and that is the ability to participate directly in the success of Xerox through employee equity ownership opportunities. My name is Patricia Nazemetz, the Corporate Vice President of Human Resources at Xerox Corporation.

Xerox employs about 93,000 people worldwide; 52,000 of those are in the United States. Of our U.S. employees, nearly 60 percent are nonexempt, and many of those employees who are located in our U.S. manufacturing facilities, over 5,000 of them, belong to the Union of Needletrades, Industrial and Textile Employees, or UNITE. I am pleased to report that UNITE shares our views on this matter and actually has provided us with a letter of support, which I would like to read to you now. The letter is written and signed by Gary Bonadonna, who is the Director and International Vice President of the Union of Needletrades, Industrial and Textile Employees, Rochester Regional Joint Board:

"I am writing on behalf of UNITE and its approximately 5,300 United States bargaining unit employees covered by a contract with Xerox Corporation. It is our understanding that Congress is currently considering legislation to clarify the Fair Labor Standards Act treatment of stock options and other forms of stock grants in computing overtime for nonexempt workers.

 

Xerox' UNITE chapter would strongly urge Congress to pass legislation exempting stock options and other forms of stock grants from the definition of the regular rate for purposes of calculating overtime.

It is only recently that Xerox has made bargaining unit employees eligible to receive both stock options and stock grants. Without a clarification to the FLSA, we are afraid Xerox may not offer stock options or other forms of stock grants to bargaining unit employees in the future. In addition, without such a change in the law, if options are granted, there could be tremendous differentials in the amount of overtime each individual employee receives based on when he or she decides to exercise an option or sell stock. However, our position that options should be exempt from the regular rate for purposes of overtime in no way diminishes our position that bargaining unit employees must have the right to receive overtime pay for actual hours worked.

As we begin the 21st century, UNITE hopes more companies will begin to provide all their employees with stock options and other forms of stock. It is a great way to ensure that when the company does well, the employees share the reward through employee ownership. Thank you for your consideration of this matter."

 

At Xerox, we have found that employees need to be properly compensated for individual performance and accomplishments, but equally important to ensuring the overall company's performance and success is rewarding all employees, not just highly compensated management employees, with a share in the success of the company through equity ownership opportunities.

So one thing that we have done at Xerox to ensure that all employees share in the company's success and enjoy ownership has been to amend our profit-sharing plans to allow all employees to receive stock options and, within the union profit-sharing plan, units or contributions to the Xerox stock fund as well as cash under this plan. To be eligible for the plan and the plan benefits, employees must have completed 1 year of service. Our profit sharing contributions can range all the way up to 15 percent of eligible pay.

The amount of the payout is directly linked to growth in our earnings per share, year over year. Since EPS and the price of the company's stock are linked, they provide our employees with a way to measure the company's success. We educate all of our employees on how such variables as EPS work, and we provide our employees with materials on how the value of stock works in relation to the value of their stock options and how these vehicles and the plans under which they are granted operate.

I believe that the concept of stock options was explained by one of the previous individuals, so I will not go into that in any detail. But I will say that under our profit-sharing formula, employees become vested in stock options or have the right to exercise them over a 3-year period at the rate of one-third each year. At Xerox, the options under

this plan remain in effect for 8 years or for as long as the employee is with the company, if that is less than the 8-year period. This is called the "exercise period" or the amount of time the employee has to exercise the options received. Employees' options expire at the end of that period if they do not take the action to exercise them.

If the price of Xerox stock increases, an individual benefits from the options when they are exercised. Employees at Xerox can exercise their options by buying and selling them immediately for a cash profit. This is typically known as the cashless exercise process, or they can buy and hold Xerox stock. However, cashless is the most common and, we believe, the most fair in that it allows everybody to participate and benefit from stock options and stock option programs.

The profit or gain is the difference between the market price of the stock at the time of the exercise and the option price. Employees benefit from the difference. And employees can exercise their options any time after they are vested in them up until the time they expire. I think it is important to note that unlike base or regular rate of pay, there is no guaranteed value that one will receive from a stock option. Thus, stock options can return sizable profit when they are exercised, or they can return a smaller profit, depending on the time when they are exercised. They can even expire unexercised and without any dollar value.

It is important to note that once Xerox awards stock options to the employee and the employee has vested in those options, Xerox has no control or authority over when the employee chooses to exercise his or her options. Instead, the employee has to make that decision based on his or her own individual financial needs and their judgment and the level of the stock price.

Although some employees may choose to exercise as soon as they vest in the stock, most employees hold their option for a substantial amount of the exercise period, hoping to share in the full future growth of the company, since the option is much more likely to have a higher value if exercised toward the end of the period than when the individual first vests. These, we believe, are investment decisions that the individual employee must make, similar to investment decisions that they make with connection to how they invest their 401(k) funds.

Just as profits on an employer's contribution to profit-sharing plans for the benefit of employees are not included in the employee's base pay, neither should an employee's profits on employee stock options or any other employee equity ownership opportunity be included in their base pay rate.

Just as exceptions to the regular rate of pay exist for purposes of calculating overtime for nonexempts, for gifts, discretionary bonuses, profit-sharing, and thrift plans, as well as for the value of a variety of welfare plans, we believe there should also be an exception to the regular rate of pay for equity ownership opportunities for employees.

In summation, we believe that aligning the interests of our employees with the interests of shareholders and providing all of our employees with the opportunity to share in the growth and success of the company is best accomplished when we are able to provide all of our employees with equity ownership opportunities. To be required to pay overtime to nonexempt employees based on employees' individual investment profits

would result in unfair differentials in the amount of overtime similarly situated employees would receive and would create an unacceptable administrative and financial burden on the company. As a consequence, companies simply will not make such grants to nonexempt employees, which is why our union feels so strongly about this issue.

We believe that Xerox is representative of broad trends among all employers. Our testimony also reflects the position of the U.S. Chamber of Commerce, which strongly supports the need for legislation to permit employee equity ownership opportunities to flourish. We therefore ask you to pass legislation exempting stock options and other forms of employee equity opportunities from the definition of the regular rate of pay. And I thank you for the opportunity.

WRITTEN STATEMENT OF PATRICIA M. NAZEMETZ, VICE PRESIDENT, HUMAN RESOURCES, XEROX CORPORATION, STAMFORD, CT, TESTIFYING ON BEHALF OF THE U.S. CHAMBER OF COMMERCE, WASHINGTON, DC- SEE APPENDIX H

Chairman Ballenger. Thank you, ma'am.

You know, I would have thought basically that stock options are attractive for companies like Ms. Martinko's or Ms. Rosa's, the small, growing companies which need to entice workers from other companies, saying, how much stock will you give me if I come. But then you see, the really big companies like GTE and Xerox are also involved in this.

I would like to ask each of you a question. Have you ever had any employee request not to be included in stock option plans? Realizing the number of employees that you have, you might not be in a position to know that, but I am curious if you have ever heard of it.

Mr. MacDonald. I am familiar with one instance because of religious beliefs, people asked not to be included in it because they thought it was some form of gambling because there was an upside-downside to it. But that is the only time I have ever heard of it.

Ms. Nazemetz. And I, sir, have not. In fact, we negotiated this change to our profit-sharing plan with our union, and I met with virtually every member of the union at least in our Rochester location, and no one even suggested that they didn't want to participate in the plan.

Chairman Ballenger. I think they are highly intelligent. You noted in your February 28th response to the Committee Members that employees had no choice but to participate, and I ask you how does the concept of voluntariness, with respect to this apply?

Mr. Kerr. Remember, this is not prescriptive. This is a list of possibilities of things we think might be used to divide the benefit idea from the compensation idea, as we have done in other sections of 7(e). Voluntary simply means does the employee have the choice to exercise? And that is something that I think is almost universal in these plans.

Chairman Ballenger. Yes, I would see no reason why they shouldn't be allowed.

Another thing that surprised me is the number of exempt employees. For instance, in Ms. Rosa's case, what was it, 11 percent? A very small number of exempt employees, where in the big companies it was 33 percent or that is where I would have

thought the exempt employees came from. Being a manufacturing person, you always figure that there are more exempt employees in a manufacturing firm, but I guess in these high tech firms that you happen to work for, the exempts are less.

Ms. Rosa. In the minority.

Chairman Ballenger. Right. The whole philosophy is kind of lost on somebody who is thinking back in the older days. Ms. Martinko, how many exempt employees did you have? Were you not the one who had such few exempt employees?

Ms. Martinko. Right. We have 12 percent; 1,100 in the U.S., and 12 percent of them are nonexempt.

Chairman Ballenger. Do you have truck drivers in your company?

Ms. Martinko. No, no.

Chairman Ballenger. I didn't think so. You can send all of your stuff over the Internet.

Ms. Martinko. We try to make a practice of automating everything, sir.

Mr. MacDonald. You know, Mr. Chairman, to your point, because I sense where you are going, you know we talk about compensation, retention and all of that, and some people may want to characterize it that way. But in my mind, one of the real reasons why we are doing this, is because of the intrinsic approaches that we get from it. I mean, this is all about trying to build commitment, trying to build loyalty and pride within the organization.

And I was not being quick with my response in talking about the correlation between satisfaction and the stock price. I mean, people are beginning to relate to the organization. That is what you are trying to build, because when you are dealing with customers, you want them to feel good about dealing with the customer and feel good about the company they work for. So I think that we don't have to differentiate this between exempt and nonexempt. What we are really talking about is trying to build that commitment level into it.

And, sure, whether it is compensation and benefits is not really the issue. The issue is people are feeling a sense of ownership, a oneness, if you will, with the corporation.

Chairman Ballenger. I wonder, Mr. Kerr, how you would differentiate situations when you do this with stock. We will exempt that, but if you do it with money, you have to go back and calculate it the old way. Have you puzzled that one in your own mind?

Mr. Kerr. The wrestling here is when, in our experience, the way the act is constructed. Do these look like compensation? When do they look like something else? In the opinion letter, the request was we have a stock option idea here, how does it fit with your current exemption? And the bulk of the answer is it is not a gift. It is not a profit-sharing plan. It is not a discretionary bonus. It does not come under one of the short list of exemptions that we have in the act.

And when that was raised with us and raised with the Secretary, the powerful tool that these are to corporations was made known to us and the powerful identification that these make with employees, with the economy, and with the growth of their own companies. And we have an Act that has a broad definition of remuneration and then has some specific exemptions. In order to talk about this new force in the economy, and in order to fulfill the purpose of worrying about compensation, but also understanding that this was something new that was important for all employees, after looking at the exemptions that we had, as was done in the letter, also after some early conversations with people about how stock options worked, we thought maybe the thrift savings section of the act was something that you could use by analogy to cover a lot of these. We then looked around and talked to some more people.

That analogy would cover some, but certainly not the bulk, and my guess is not the ones that the companies that have talked to you here today about. And this leads us to agreeing with the people at the table here that there is an important public policy question here. In order to address it, we have to look to the Act and to change the Act.

Chairman Ballenger. Mr. Nadel, I was reading your testimony, and also listening to it. It appears to me that each company has to figure out their various and sundry plans, and put in their own desires and wishes as to how they want to do it. It would be almost impossible to say how many variations you could have on one of these. Nobody has even thought about trying to see how many different ways you could do it.

Mr. Nadel. That is correct. Just when you think you have seen it all, there is always something new. But there are many types of programs. There is also some confusion. People, for example, refer to stock options, and they will differentiate that from a stock purchase plan. Under Section 423 of the Internal Revenue Code, employee stock purchase plans are described as such. But when you read the statute itself, you are really dealing with stock options. So there is no fine line between a stock purchase plan and stock options.

In other cases people will describe them as a stock purchase, but there might be no purchase price, so essentially they are giving the stock to somebody. So it is a grant of a stock. There are many variations, and there is much less tax regulations in terms of prescribed formats in many cases, so there is more flexibility that companies have in the design, and it could fit a variety of circumstances.

And we are working with companies now where there are foreign parent companies, and they are trying to offer stock in the United States. In trying to fit rules that satisfy the foreign securities laws at the same time as satisfying the U.S. rules, they will make various changes and as a result will come up with something that is different than what we have seen before.

So, I agree in that there is no one prescribed, or two or three prescribed, formats that these always take. There are many different variations. Something we refer to as stock appreciation rights, and while we don't see them often, we will see them in very specialized situations, but that is the delivery of cash. A stock appreciation right is the economic equivalent, but you are giving cash, but it is measured in reference to the stock.

Again, that is something that we view as equity. Others might view that as cash, and

therefore it is more akin to regular compensation. But it is measured with regard to stock, and people see it as a stock alternative. And that is why there is no bright line, and it is difficult to even draw parameters in terms of what is a stock option plan.

Chairman Ballenger. Right. I think my time is up. Mr. Hoekstra?

Mr. Hoekstra. Thank you, Mr. Chairman for having this hearing.

I am thankful every night for the Department of Labor, which is there to protect us from people like yourselves who are using stock options to get around paying people overtime. The next thing you are going to do is you are going to have people working at home to get around OSHA. And then we are going to have to have OSHA going into our employees' homes around the country to make sure that they meet OSHA requirements. One of these days the Labor Department will even recommend that.

Mr. MacDonald, as part of our annual plan after we got here a year, we said there is no such thing as a no-brainer in Washington. It is part of our annual plan each and every year. But if there were such a thing as a no-brainer, this would be it.

Mr. Kerr, when I read the list of things that the Labor Department thinks that we need to discuss and analyze over the next 6 months, and maybe 6 years, before we actually will do something or maybe get a proposal from the Labor Department and the extent to which the terms encourage long-term savings and investment in the company. What in the world is the Labor Department's interest or right to determine whether an employee saves or decides to spend that cash after they exercise an option?

Mr. Kerr. This list is not intended to take us 6 months.

Mr. Hoekstra. I am sure it will take us longer.

Mr. Kerr. These are things which we have discussed with some of the businesses and some of the representatives of the business groups. These are some of the things that the law now uses to allow the exemptions that are in the Act to work. So in the thrift savings section, the Act says if it is called a thrift savings plan, and there is the opportunity to save over a long term, then it is not included in the regular rate. This is something we want to work with you and the Members of the Committee to resolve.

And I don't want you to think that talking about ways the Act has distinguished between compensation and benefits in order to allow exemptions like we want to allow here by amending the Act is an attempt to slow a process down. We are as interested as anybody else in doing this quickly.

Mr. Hoekstra. We have worked hard this week. We were here Monday and Tuesday and all day yesterday, and some of us may be here tomorrow. Do you think that the Labor Department could have legislative language for us by next week that the Administration would propose?

Mr. Kerr. I think that we would be delighted to come up and sit down with the Committee and talk about what legislative language might look like. We would like to

do it in conjunction with the people we have been meeting with and the people at this table. We have people who have been thinking about, and if staff can come up and meet with your staff, we would be delighted to do that.

Mr. Hoekstra. You don't have proposed legislative language?

Mr. Kerr. Not with me here today.

Mr. Hoekstra. Do you have some back at the Department?

Mr. Kerr. We have not concluded the conversations with the groups we have been talking to. We have thought about what language would look like. We do have people that are prepared to come up and sit down and talk about what the language would look like.

Mr. Hoekstra. You have thought about this a whole lot more than I have. I kind of agree with Mr. MacDonald, this is a no-brainer. We have been talking about this for an hour and 3 minutes, which is about an hour longer than it needs to be talked about. And, you know, I think the letter was actually February of 1999. You have got people over in the Labor Department that are thinking about this extensively.

Mr. Chairman, I am sure that you can sit down with the Labor Department and with the great relationships that you have over there, that we will have something in this committee that we can mark up in the next couple of weeks, because it should not take any longer than that. This is not a new idea. I left the private sector 7 years ago, and I had options. I really was hoping that they would have been calculated for overtime pay, because mine were underwater, and I was expecting a refund. So in that case, I hope that this is not retroactive. I hope that it goes into effect the day we pass it. I don't know whether I have to go back to my employer or the IRS to claim a refund. I guess maybe I would have had to exercise them to claim my loss, but whatever.

I would be very disappointed if this thing took us more than a couple of weeks, because like the home office issue, this is about as close to a no-brainer as you can get. Thank you, Mr. Chairman.

Chairman Ballenger. Mr. Boehner.

Mr. Boehner. Mr. Chairman, thank you. I have some empathy for Mr. Kerr's position, because as the chief of the Wage and Hour Division, he is saddled with a law that was written in 1938. And I have been on this Committee now for over 9 years, and we have

had a series of these types of hearings, whether it is the Fair Labor Standards Act, whether it is the National Labor Relations Act, whether it is the Landrum-Griffin Act or other pieces of legislation mostly written based on a labor-management environment from the 1930s.

And over the years we have tinkered slightly with these various pieces of labor legislation, but it is clear that the labor environment, the management-labor environment at most companies today is vastly different than what it was in the 1930s. We have moved toward an environment of worker empowerment.

Companies have recognized that it is in their best interest, and in their employees' best interest to empower their workers to be all they can be for themselves and for their company, and working together they create much more successful companies and much more competitive companies in this worldwide economy that we find ourselves in today.

At some point, Mr. Chairman, the Congress of the United States needs to look at all of these labor laws that we have on the books and say, enough is enough. We ought to begin to rewrite labor law across the board to reflect the realities of the 21st century, not of the 19th century when most of these laws were created.

And I am hoping that once we get through the Presidential election and we have a new President, of either party, that the Congress and the Administration will look each other squarely in the eye and make the decision that it is time to move ahead.

We have the same types of problems in other parts of the Federal Government. Look at telecommunications. All the laws that were written back in the early part of the century through the 1930s and 1940s are totally outdated today. Yet trying to change them and trying to change the monopolies that were created as a result of them to reflect the realities of the current marketplace has been very difficult.

Having said all of that, I would like to ask Mr. MacDonald and Ms. Martinko, have you found that giving the rank-and-file employees stock options and access to other stock-based incentive schemes, has made your company more competitive? Do you believe it has had an impact on your employees in terms of their morale, their initiative or their productivity? Ms. Martinko, you want to begin?

Ms. Martinko. I can tell you that it absolutely has. And I will particularly relate to the experience that I had over December of 1999, which is not too long ago, when all of our employees had their first broad-based stock option plan vest, and it happened to coincide with a period when our stock was taking off. As I mentioned before, it was roughly three times higher than when those options were granted, and you could not walk down the hallway and not feel the electricity and the buzz in the air. Everyone was behind that. Look at what is happening, it is great. "What can we do to make it go higher?" Everyone has gotten involved. Everyone is behind it.

It also offered me a personal opportunity, being relatively new to the HR role that I was in, to meet every single employee in the company, because every single employee in the company was saying, what do we do to get that price up? How do I cash this out? What can I do to make it grow? So it has definitely created a tangible interest in terms of the employees being more committed.

We also have an employee stock purchase program. That was mentioned here. And we have 75 percent participation in that program worldwide. So we have a stock-savvy population. They expect to be able to participate in those type of programs, and it does make a difference in how they approach their jobs.

Mr. MacDonald. Congressman, I think I already mentioned the correlation between satisfaction and stock price, so here are a couple of other examples. If you look at the 1996 grant, the price at that time was $38.50, and the price of the 1997 grant, about 14 months later, was $42.57. Today, the average employee would realize $3,500 of real money on appreciation.

Mr. Boehner. Before taxes.

Mr. MacDonald. Absolutely before taxes. I could go to that hearing as well.

Mr. Boehner. We will get to that.

Mr. MacDonald. One thing that I think is interesting is that people automatically believe that individuals are exercising as soon as the vesting period is done. We are finding, however, that people are holding on. They understand the up-side potential. They have 10 years to make money on that option, so that they are really beginning to pull and understand how this company in the long term is working. That is one of the things that has been successful, and I think management in particular has been criticized over the years for thinking short term. We begin to talk about long-range plans where we do acquisitions and mergers, and people understand that now.

Mr. Boehner. I think almost all the witnesses today talked about the short-term benefits of stock options, the ability to increase the income for their employees. But I think all of us know that many employees take their options, once they are exercised and they pay their taxes, and typically the money will go into their pocket.

How would you assess the long-term benefits of your employees holding shares longer? Not that we are going to require that, but I have been working for 3 years on a proposal looking for the right set of incentives for employees, after they exercise their option, to hold their shares for a longer period of time. Do you think that there are benefits to the employee and benefits to the company for longer-term stock ownership Mr. MacDonald?

Mr. MacDonald. I would wholeheartedly support that. I mean, the bottom line right off the bat is the up-side is there for the employee. But more importantly it goes back to what I said before. When you own that share, you are going to pay attention, I think, even a little bit more differently than perhaps you do in a different set of circumstances.

So, in fact, to be honest with you, we are really working on educating people to understand the benefit of holding it longer, for a tax reason or whatever it may be. And people are beginning to get that concept down as well.

Ms. Martinko. Yes, I would totally agree with you. I mentioned earlier that we have about 130 nonexempt employees, just zeroing in on that population. Only 10 of them chose to exercise when those options first became available. And I found that quite remarkable when I went back and sliced the data that way, because it would have been my suspicion that they all cashed out quick money, took it and ran. But in reality, talking to those folks, they are starting to understand the investment potential, and they are holding on to the stock.

It is a good way to keep people at the company, and to keep people focused on the company. I work with one employee who has been with the company in its various permutations for over 20 years. He just reached his 20th anniversary in January of 2000. He has never exercised an option except when he hit that 10-year expiration period. So the only options that he exercises are the ones that he had to, or they would have expired

on him. "When I talked to him, I asked, Harry, why are you holding onto these?" And he said, that is my retirement. I am investing in this company. And when we told him, we wanted to recognize his service for 20 years with the company, how could we do that? "Give me stock." "I don't want a plaque." "Give me stock."

Mr. Boehner. What if Harry had an opportunity to pay a capital gains tax rate on the exercise of his options and maybe even another incentive to not pay tax, even defer the tax until such time as he sold the shares? Do you think that Harry would likely still own that stock today?

Ms. Martinko. That is a fair question, and I would have to go ask Harry. I would be happy to do that. I don't know.

Mr. Boehner. Ms. Rosa?

Ms. Rosa. I don't know what Harry would do, but in my case I would certainly like to hold onto it as long as possible. Since we know that Social Security is not something that we can rely on for retirement purposes, that would be the ideal situation, in addition to, of course, the 401(k) and whatever other benefits. At my age, an example would be that I am still not prepared. If I were to retire 15 or 20 years from now, I would not have sufficient funds to live the lifestyle that I live today.

Mr. Boehner. I don't either.

I want to thank all of the witnesses for your excellent testimony, and, Mr. Kerr, I look forward to working with you to try to bring this current situation to some resolution. Thank you.

Chairman Ballenger. We are going to be bipartisan here. Since Mr. Owens is not here and couldn’t make it back, I asked his staff if they had a couple of questions they would like to ask, if you don't mind. Let me pose these two to you.

Would you comment on the general opinion, that the Labor Department didn't create the problem, it just happened. Somebody raised the issue and the Department had to make a ruling on this area of the law.

Mr. Kerr. Yes, as we have said to others, this is the only time this question has been raised with us. It was raised in the sense of, gee, if we do this, do the current exemptions apply? The answer, based on the current exemptions, was they don't. We don't have other requests on this issue.

But given our discussions with people like the witnesses here, it is pretty clear this was going to come sooner or later with respect to covered employees under the Fair Labor Standards Act. This is something that is relatively new. It is growing. The current economy encourages it. It is something the Secretary wants the Department of Labor to allow to continue to happen. So I think if we were not wrestling with it today, we might have been wrestling with it 2 months from now or 2 months ago.

Chairman Ballenger. How long has Xerox had theirs?

Ms. Nazemetz. We introduced the broad-based stock options in 1998.

Chairman Ballenger. So GTE is fairly short-term also, 2 or 3 years? So it is really a new idea that just came into effect.

Mr. MacDonald. But let me answer the question. I am an old labor negotiator, and let me tell you something. You don't ask a question across the table you don't want an answer to. Okay?

Mr. Kerr. You are right.

Mr. MacDonald. I think part of the problem is that maybe employers are their own worst enemy. Somehow, and perhaps it is in keeping with the Congressman's thought, our labor laws today have to have a practical application to them because the workplace is moving so quickly. And I think with a company like GTE, there is an integrity in everything we try to put forth. But there is not a room in these major corporations where we sit and figure out how we can screw employees. You know? We are really trying to understand how we keep employees and motivate them.

Mr. Boehner. That is the whole point, if I could interrupt. If you look at the labor laws that we have on the books, it assumes that that is the mentality of employers. Maybe that was the case long before I was born, I don't know about the Chairman, but we all know that is not the case today.

Ms. Nazemetz. If I could just make an additional comment. I think the reason that you are seeing these become more broad-based is because they have had such a powerful impact at the senior-most levels of the corporation where they have been in place for many, many years. The understanding is that these do become motivational, they do become an alignment vehicle, and they should not, therefore, be limited. That the senior management teams are not the only ones who need to be motivated and aligned is wisdom that has come a little bit late to some of us, but I think we have to understand the power of it.

Chairman Ballenger. Maybe this will apply to all of you. The question is about the education of the employee as to their rights and so forth. Do you have an organized educational program to explain to each and every employee what their rights are and how they go about it? Ms. Rosa?

Ms. Rosa. Actually, we do. Xilinx has an incredible program to educate the employees as to their rights and expirations and so forth, for both the stock option and employee stock purchase plan. We also have conferences and seminars that the company pays for for the employees to attend and learn.

Chairman Ballenger. Would that apply to the bigger companies, too?

Ms. Nazemetz. Yes. We actually treat it in much the same way as any benefit plan, and we provide full disclosure in summary plan description-like format to employees. I also want to mention that, again, having worked with our employees, nonexempt union employees, as well as management employees, they do understand this concept. They understand the power of it all the way down through the entire organization. So they look for those materials and they pay attention to those materials. We have them hooked up with a broker so they can do the cashless exercise if they choose to.

Chairman Ballenger. Let me ask one more question, if I may. Excuse me, what about you?

Mr. MacDonald. Counsel saw me take it out, and he has one as well. What I am showing is the owner's manual for the partnership shares of GTE. It is a comprehensive disclosure of what the program is, how it works, when it works, and what you do to make it happen. And this is given out to each person each time we make a grant.

In addition to that, there is a series of videotapes, and a series of briefings. To Pat's point, when you are giving benefits, you want people to understand them and you want them to use them, or you wouldn't be doing it.

Chairman Ballenger. Do you do it in foreign languages?

Mr. MacDonald. We have got it all.

Chairman Ballenger. Let me ask one more question then. Are these grants, or whatever you want to call them, just general, typical across the board, or are they based on performance? How does it work? You shook your head.

Mr. MacDonald. Our program is driven off of a broad-based program for everybody and everybody shares. I will tell you that we cut them differently based on income levels, but they are not driven off of performance. They are focused on ownership in the company.

Ms. Nazemetz. We have actually done some of each. We have done some broad-based grants. For instance, one that we have done recently is 100 options for every employee below a certain level of management. Senior management didn't participate in that one. And that was just an outright grant. There are others that are linked to our profit-sharing formula and profit-sharing plan, and that is the one that I described in my testimony. They are linked to our earnings-per-share growth year after year.

Chairman Ballenger. Ms. Rosa, was yours tied to anything that you know of, or was it just companywide and everybody got it?

Ms. Rosa. When I came on with the company, I didn't know what the process was. I knew that I received some at hiring, and I also received some at performance evaluation time. We have a focal program that designates the level of stock options that are granted to employees at different levels.

Ms. Martinko. We do some of each, very much like Xerox.

Mr. Nadel. Mr. Chairman, with the hundreds of companies we have worked with, I have seen none that are tied directly to compensation levels, if that, I think, is where your question was going. I have seen them tied to longevity with the company, to levels within the company, but in most cases they are across the board. We have seen companies that get a milestone anniversary, a 100-year-old company, everybody gets 100 shares or stock options. Certainly no one that we have seen has tied it in any way to the rate of pay that somebody was getting in terms of base pay.

Chairman Ballenger. Is it basically akin to the ERISA nondiscrimination rules?

Mr. Nadel. Well, they are provided, but many of these are provided on a nondiscriminatory basis under the section 423 plans. There are no requirements that they have to be broad-based, so we have seen incentive stock options, which initially were geared just to senior executives. In one recent survey, a third of all the options granted were incentive options granted for nonexempt employees. But in terms of what is required under the section 423 plans, the employee stock purchase plan, essentially all full-time employees have to be and are covered.

Chairman Ballenger. I greatly appreciate you coming, because I think in reality it is almost a "no-brainer". Maybe its not quite as clean as Pete would like it, but it appears to me that we all have the same train of thought and that something should be done. And I agree. I don't think it would take a real long time. My bias is a little bit different than his bias, so we sometimes disagree, but I think something could be done.

I would like to thank each and every one of you for participating in this. I only wish that the Washington Post had some kind of program like this and was sitting out there so that they would know that we actually are doing something together here. "Here is an election year, and they actually are working together?" I don't believe it!

Again, thank you for coming. We appreciate it, the Subcommittee stands adjourned.

[Whereupon, at 11:25 a.m., the Subcommittee was adjourned.]