Serial No. 106-96


Printed for the use of the Committee on Education

and the Workforce

Table of Contents













Table of Indexes *



H.R. 3462









Thursday, March 16, 2000



House of Representatives


Subcommittee on Employer-Employee Relations


Committee on Education and the Workforce


Washington, D.C.








The Subcommittee met, pursuant to call, at 10:30 a.m., in Room 2175, Rayburn House Office Building, Hon. John Boehner, Chairman of the Subcommittee, presiding.

Present: Representatives Boehner, Petri, Ballenger, McKeon, Andrews, and Kildee.

Staff Present: David Frank, Professional Staff Member; Christopher Bowlin, Professional Staff Member; David Connolly, Jr., Professional Staff Member; Ben Peltier, Professional Staff Member; Amy Cloud, Staff Assistant; Peter Gunas, Workforce Policy Counsel; Patrick Lyden, Professional Staff Member; Deborah Samantar, Office Manager; Gail Weiss, Minority Staff Director; Michele Varnhagen, Minority Labor Counsel/Coordinator; Maria Cuprill, Minority Legislative Associate/Labor; Woody Anglade, Minority Legislative Associate/Labor; Brian Compagnone, Minority Staff Assistant/Investigations.

Chairman Boehner. A quorum being present, the Subcommittee on Employer-Employee Relations will come to order.

We are holding this hearing today to hear testimony on the Wealth Through the Workplace Act. And under Committee Rule 12(b), opening statements are limited to the Chairman and Ranking Minority Member.

And with that, I ask unanimous consent for the hearing record to remain open for 14 days for witnesses' written testimony, the Members' opening statements, and other material to be submitted for the record. Without objection, so ordered.



Before I say a few words about what the bill that we are considering today is I want to be clear about what it isn't. It does not in any way involve the effort by Mr. Ballenger and others to correct the Department of Labor's interpretive bulletin suggesting that stock options must be used to calculate overtime wages under the Fair Labor Standards Act. I look forward to working with him and Chairman Goodling and others putting that matter to rest as soon as possible.

Nor does it in any way involve the Subcommittee's work on ERISA modernization. This bill is completely independent of both, to be pursued entirely on its own merits and its own schedule.

I have been working on this particular bill for about two years and the vision it represents since I started in public service. At its core, that vision is simply this: that working together there is no limit to what we can accomplish. That is true of neighborhoods. That is true of us in Washington. And that is very true of business today.

American businesses are appreciating the value of teamwork now as never before. They are learning to compete successfully in the global marketplace. They need to engage the full talents of all of their workers. They are teams, if you will, as never before.

They are finding their most important asset isn't their physical plant; it is the talent and work ethic of their entire team. That is why teambuilding is replacing bureaucracy throughout our country. And that is what defines what we call the ``New Economy.''

The New Economy companies aren't just high-tech firms. They are companies that understand the value of their workforce as a team and organize themselves around team dynamics. That goes for companies that make sofas in Southwest Virginia, as well as companies that make Internet servers in Silicon Valley.

A critical part of teambuilding is getting everyone on the same page, making sure that everyone is motivated by common interests. It is not hard for new companies to do this, but it gets harder as the business gets older and bigger. And that is the value of stock options. By making the employee a shareholder, stock options also make them valued team members who see their interests and those of the rest of the team as one and the same.

New Economy companies understand this. Stock options are part of almost any compensation package in the high-tech sector. But increasing numbers of more established companies also understand the power of stock options and make them widely available to their employees. These companies range from 3M to Pepsi to Merrill Lynch, to Citigroup, to CBS.

This bill, the Wealth Through the Workplace Act, is intended to promote this vision of broad-based employee ownership by creating a new kind of stock option. This would not replace existing legal treatment of stock option plans, but would offer a new vehicle. This new vehicle would provide deductibility to the employer, as with today's non-qualified stock option plans, and no taxation until the employee actually sells the shares.

Today, employees have to pay tax when they exercise the options, which forces

them to sell their shares immediately upon exercise. This means many employees have to give up long-term appreciation in their stock. It also means that for many the effectiveness of the option as a teambuilding incentive expires as soon as the option is exercised. This new vehicle would offer a limited number of employee protections designed to make sure the stock for which the options are granted can be easily traded, and provide the information employees need to make the decision to buy or not. The employees' existing cash compensation would not affected by these new options.

Finally, the bill amends ERISA by establishing a safe harbor. If the conditions are met, ERISA is satisfied and the stock option plan qualifies for favorable tax treatment. If not, it doesn't qualify for the favorable tax treatment that this bill specifically grants. There are no punitive provisions.

Employee ownership is showing real benefits in today's economy for both employers and employees. And I believe this bill represents a step toward enhancing these benefits and toward building the team-focused workplace of the 21st century.

I look forward to working with my colleagues on this Committee and on the Ways and Means Committee toward what I hope will be its ultimate enactment into law.





Mr. Boehner. I now yield to the distinguished ranking member, my friend from New Jersey, Mr. Andrews.




Mr. Andrews. Good morning. Thank you, Mr. Chairman. I commend you for having this hearing and for introducing your legislation. I think it makes an important contribution in an area that is a win-win situation for the American economy, for employers, for employees, and for our communities.

This is a very promising area. Today's hearing, I believe, is a first step in creating a bipartisan consensus to make this promising area a fertile ground for new legislation that would encourage more employers to do what many of them are already successfully doing. That is giving or having employees earn, I should say, a piece of the ownership of the American dream.

On January 19, 1999, I introduced H.R.338, which is a similar piece of legislation because it is designed to encourage more employee participation in the ownership of the firms for which employees work. There are differences between my bill and Chairman Boehner's, but there is an important common ground, and that is the recognition that a voluntary system of broadening employee ownership is good for the economy and good for the country.

I think it is good in three important ways. First, this is a management tool. People respond better, and I think they perform better, when they have a stake in the outcome. American workers have seen too many promises broken, and frankly, they are very cynical about teambuilding rhetoric, and justifiably so if that stake is merely rhetorical, or the promise of good things to come.

They are not cynical when they see their wealth grow, or when they see their assets increase because of the value of the firm that they are working for. As the firms value increases so does the wealth of the individual employee. So as a managerial tool, I think that this is a dynamite concept that needs to be expanded.

As far as the issue of personal security, we have spent a lot of time this winter and spring on the issue of pension security. One of the best ways to enhance retirement security is to increase non-pension and non-Social Security savings of people, so that they have their own independent source of income when they retire. There is no finer source of independent income than a substantial ownership stake in the firm for which someone devotes his or her work effort. So this is good for retirement planning.

And, finally, I think this is good for the whole area of corporate responsibility. There are many instances where employers and corporations make decisions that are destructive and harmful to families and communities. Sometimes those decisions are made regrettably because employers have no other choice. Sometimes those decisions are made in ways that I think could be avoided.

The record is clear that a firm, or an employer, that has significant employee ownership is much less likely to pull up stakes and walk out of a community. It is much less likely to favor massive layoffs over other corporate strategies, it is much less likely to be a bad corporate citizen, and much more likely to be an exemplary corporate citizen.

I don't think that we should pass laws that mandate that on employers, because I don't think it would work. I would love to see no plant closings, no mass layoffs ever again. But I understand that us passing a law requiring that would be ineffective and, in fact, destructive in many cases.

I don't think that we should be bystanders and say that when these kinds of things happen to communities there is nothing we can do about it. I think that's an effective strategy. I think the strategy that is outlined by the bill that is before us today is an effective strategy, because it encourages, on a voluntary basis, the broadening of ownership by employees. I think that strategy will be an important tool toward enhancing corporate responsibility in communities across the country.

So, Mr. Chairman, I look forward to hearing what our panel says this morning. I look forward to working with you in following up on what we hear this morning, to try to build a bipartisan consensus to change the law in a constructive way.

And the only other request that I would have is that I would submit for the record, by unanimous consent, a statement from Ownership Associates, Inc. A gentleman that we had attempted to get here as a witness this morning was unable to be here, but I would like his statement added to the record.

Chairman Boehner. Without objection, so ordered.




Chairman Boehner. It is my pleasure to introduce our witnesses. Our first witness today will be Mr. Patrick Von Bargen. Mr. Von Bargen is the Executive Director of the National Commission on Entrepreneurship. NCOE serves as the leading source of information on employee stock ownership plans, "ESOPs", broadly granted employee stock options, and employee participation programs.

While he will be able to address stock option programs in general, Mr. Von Bargen will be able to provide the Subcommittee with special insight into the use of stock options by entrepreneurial and other small to medium-sized employers.

Our second witness is Jane Greenman, and she is the Deputy General Counsel for Human Resources for Honeywell, and testifying today on behalf of the Association of Private Pension and Welfare Plans. Honeywell is the major producer of a wide variety of products, including automated controls for the aerospace industry, automotive, pharmaceutical, fibers, plastics, and they produce air filters for cars and trucks in my district.

They employ some 12,000 people in countries throughout the world, and Ms. Greenman will be able to provide the Subcommittee with an in-depth analysis of how major employers use stock options and similar tools to recruit and retain workers and align the interests of those workers with the interests of the company.

Our third and final witness will be Tim Byland. Mr. Byland works for INTERVU, Inc. INTERVU, Inc. provides services to other businesses that allow them to deliver live and on-demand audio and video streaming over the Internet. Byland is somewhat of a rarity on Capitol Hill. He is just a real live person, and doesn't get involved in government. But I think he can provide the Subcommittee with his view on stock options from the perspective of an employee.

Before the witnesses begin their testimony, I remind Members that we will be asking questions after all of the witnesses have testified.

Typically, we have five-minute lights here. We didn't use them last week. I don't think we will use them today. We would like for you to keep your testimony to about five minutes, but if you go a little longer feel free.

With that, Mr. Von Bargen, you may begin.




Mr. Von Bargen. Mr. Chairman and Members of the Subcommittee, thank you very much for inviting me to present testimony on the Wealth Through the Workplace Act of 1999. As the Chairman indicated, I am the Executive Director of the National Commission on Entrepreneurship. I am filling in for my Chairman, Doug Mellinger, who could not be here at the last minute. And he does send his regrets.

Essentially, our organization has a three-year charter from our funding entity, which is the Ewing Marion Kauffman Foundation of Kansas City, Missouri, to help policymakers better understand the needs and interests of entrepreneurs, and to inform public policies that support those needs. Our Commission includes leading American entrepreneurs from around the country, and we work with high growth entrepreneurs throughout the U.S. as we do our work.

I want to thank the Subcommittee for holding this hearing and commend the Chairman for introducing this piece of legislation. As the Subcommittee certainly knows, we are enjoying a true boom in entrepreneurship in the United States today, and I want to just briefly cite some data to make this point. Each year Americans start 600,000 to 800,000 new companies that hire employees. That is each year. That adds up to roughly 14 to 16 startup businesses for every 100 existing businesses.

At the same time, an additional 2 million new businesses are started each year as self-employment ventures. And overall about 8 percent of the American population is in some stage of trying to start a new business. This is a very robust level of new business activity that really produces bottom-line results. New high growth businesses, often referred to by some as gazelle businesses, account for over two-thirds of the new jobs created every year in the United States, even though they comprise only five to 15 percent of all businesses.

Mr. Chairman, I would like to enter into the record, if I may, a white paper the Commission has drafted that tries to outline, in excruciating detail, the contributions of entrepreneurial companies in the United States to our economic growth.

Chairman Boehner. It will be included in the record.

Mr. Von Bargen. Thank you, sir.

Startup companies rely heavily on stock options, and in competitive high-tech sectors they, in fact cannot do business without them. Our Commission has held about 17 focus groups with entrepreneurs around the country, and without exception they have told us that the number one concern they have today is recruiting and retaining talented people. They have also told us that stock options are an absolutely essential part of the recruiting and retention tool kit.

Indeed, companies without option programs are often at a strategic disadvantage, and in today's knowledge-intensive business world you can't succeed without high quality people.

The use of stock options is growing at an extremely rapid pace, to the point where in some industries options are the norm in compensation packages. As many of you know, options are not new. They were started in the '40s and '50s, and until quite recently were actually restricted to top management. The major change that has occurred over the last 20 to 25 years in the field is that options are now becoming democratized and are now available to a wider range of employees. This is a very positive trend, which could be reinforced by H.R. 3462.

According to the National Center on Employee Ownership, between 7 and 10 million employees now receive options. That is a dramatic increase. In 1992, for example, only one million employees received options. So you can get a sense of the acceleration of this process.

The growth in options is especially prevalent in startup companies, particularly those in hot sectors like biotech, software, and Internet-related businesses. For example, the NCEO surveyed venture capital backed companies and found that 100 percent offer stock options. Studies of the biotech and Internet sectors by Westward Pay Strategies have produced similar results.

Entrepreneurial firms also tend to be more democratic and aggressive in their use of options. For example, the NCEO survey I just cited found that 83 percent of all companies that they surveyed offered options to every new hire, every employee from the secretary/receptionist on up to the vice president for marketing.

These new firms also share more equity with their employees. A study by one firm that designs compensation packages found that the typical Fortune 500 company grants options that equal 1.25 percent of its outstanding shares each year. In contrast, software and Internet companies on average grant options equal to anywhere from 5 to

8 percent of outstanding shares per year.

The Chairman and Ranking Member have both eloquently summarized the benefits of stock options, and I think I will not review that with you except to endorse their statements completely and with great enthusiasm. I do want to mention, though, that stock options face a number of challenges right now. The first one is new regulations on option use.

In recent months, I know the Subcommittee on Workforce Protections has recently examined the Labor Department's proposal to include options in overtime pay calculations. So I won't touch on that issue today. And, of course, in addition, the Financial Accounting Standards Board is considering changes to rules regarding the expensing of options. And both of these steps could serve to decrease the use of this innovative compensation tool.

The second issue is employee education. Despite the growing prevalence of options in the workplace, there is no doubt that improved education as to what options are, how they work, what the up sides and the down sides are, is needed.

The third is short-term perspectives. As the Chairman pointed out, one of the benefits of stock options is that they create a long-term mind-set among employees. Yet this theory doesn't hold in practice as the vast majority of option shares are sold on the day the options are exercised for tax reasons. It makes sense to seek incentives to encourage more long-term holding of options.

Finally, we need to further democratize the use of options. While options use is growing, we should encourage a wider sharing of equity and an increase in the use of options across all industrial sectors. Option grants are still concentrated in upper management, and any effort to expand their use should be encouraged.

And that gets me to the Wealth Through the Workplace Act, because it is designed to be helpful on these last two challenges I just identified. It creates a new form of stock option that allows employees to defer all taxation on their options until the shares are sold. And, in addition, companies would be allowed to deduct the value of the options upon the exercise.

This new approach makes some very important changes in the treatment of employee options. Under current rules governing non-qualified stock option plans, employees must pay tax upon the exercise of the option on the difference between the stock's market price and the exercise price. This practice encourages workers to immediately cash out in order to pay the tax on the shares.

If this tax could be deferred, employees would be persuaded to hold the stock for that longer period of time that I just mentioned. This shift obviously could have several benefits. It would maintain an employee's stake in the long-term health of the company, and also provide financial benefits to the employees if the stock continues to appreciate over time. And then employees might even be encouraged to increase their retirement savings via these options.

In addition to fostering a more long-term perspective toward options, H.R. 3462 could also help encourage their wider use within companies. The tax incentives for employers should help expand the use of the options. In contrast to other types of options and stock purchase plans, the employer will receive a tax deduction upon the employee's exercise of the option, and the legislation requires a minimum of 50 percent of all employees to be offered the right to participate.

Finally, we would also expect that employee demand for options would further expand because of their favorable treatment under the proposal.

As the Subcommittee continues its deliberations on this legislation, we urge consideration of two additional issues. First, we recommend that the Subcommittee support expansion of employee education about options programs. Employers and employees cannot take advantage of this powerful tool if they do not understand how options work and how their tax treatment affects total compensation and their long-term financial health.

And, second, we should work to ensure that this very useful proposal works well with other equity sharing tools now in the Code. In addition to the various types of stock option grants, employers can also share equity through employee stock purchase plans, or through employee stock ownership programs. These tools also enjoy a very positive track record and should be considered as a critical part of any effort to expand equity ownership in American business.

So the final provisions of the bill should ensure that the new wealth of workplace options complement other qualified and non-qualified options programs. This is the most effective means to achieve the goals of the legislation, which are an incentive for sharing of equity in more companies and among more employees.

Thank you for asking me to join you today. On behalf of the entire National Commission on Entrepreneurship, I commend you for holding this important hearing today, and I stand ready to answer any questions you may have at the end.








Chairman Boehner. Thank you. Ms. Greenman?






Ms. Greenman. Yes. Thank you. Good morning, and thank you, Mr. Chairman and Members of the Committee, for the opportunity to appear this morning.

I am Jane Greenman. I am Deputy General Counsel of Human Resources with Honeywell International, as you said, and I am here representing APPWP - The Benefits Association, where Honeywell serves on the Board of Directors.

I want to thank you particularly for holding this hearing on the Wealth Through the Workplace Act and for your leadership in creating a positive environment for extending the benefits of stock ownership to American workers. No longer just the prerogative of executives, stock ownership programs are increasingly part of the benefits package of non-managerial and hourly employees.

Using a diversity of innovative stock plans, APPWP member companies across a broad range of industries, such as Honeywell, extend equity ownership to rank-and-file workers. Recent surveys show that approximately six million non-management employees are accumulating wealth through stock options. Broad-based programs enable workers to become owners of their companies, giving them a personal stake in the success of the corporate venture 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 competitive labor market.

Honeywell, as you may be aware, is a diversified technology and manufacturing leader in aerospace, chemical, transportation, and control technologies businesses, and employs about 120,000 people in 95 countries, and employs people in virtually all 50 states of the United States.

Honeywell maintains a stock option plan currently for certain of its employees. The purpose of the plan is to promote shareholder value by encouraging sustained performance by our employees. The plan provides workers with the opportunity to acquire Honeywell stock and thereby directly aligns the financial interests of Honeywell employees with those of our shareholders.

Honeywell's practice has been to grant stock options, both to executives and non-executives. Our Board of Directors firmly believes that grants to non-executives provide an important incentive for our company's future leaders. Non-executive employees have been vital participants and even originators of many initiatives that have significantly contributed to our company's success.

Ownership through stock option grants, as well as through our savings plan and our worldwide stock purchase plan, encourage future contributions of this type and promote a long-term success perspective for our employees.

Turning to H.R.3642, APPWP believes that this legislation marks a major step forward in improving our nation's compensation and benefits policy. Your bill creates what I would call a ``super option'' by pairing the employee tax advantages of qualified stock options with the employer tax advantages of non-qualified options.

This unique design limits the negative tax consequences for employees, while also providing employers with a significant new incentive to offer stock ownership plans. If enacted, we believe the bill would accelerate the existing trend toward broad-based stock arrangements. The potential improvements in productivity, economy well being, and employment satisfaction for millions of Americans could be quite substantial.

Moreover, H.R.3462 encourages employees to save for the long term by applying the favorable tax treatment to these super options that are retained for the requisite holding period. In this way, H.R.3462 encourages workers to remain stakeholders in our economy and helps them achieve retirement security.

APPWP has had ongoing and productive discussions with your staff, Mr. Chairman, regarding H.R.3462, and we believe that certain modifications would make the legislation even more effective. Let me briefly mention just a few of our suggestions.

First, we believe it is critical to clarify that the new super option will not displace or lead to adverse consequences for the existing varieties of stock option plans. We think the legislation recognizes this need in Section 3(h), but believe that this protection for existing stock plans can be made even stronger.

We are also concerned that the super option plan, unlike other stock option arrangements, would be subject to Department of Labor regulation as an ERISA-governed plan. This raises a number of concerns.

First, while the legislation does attempt to minimize new burdens, we are concerned that regulatory obligations under ERISA, and employers' fears that future ones might be added, could discourage many employers from offering this new type of option.

Second, many stock arrangements are presently regulated by the SEC, and so regulation by the DOL under ERISA poses the risk of duplicative and conflicting guidance.

Third, equity-based plans are a specialized area involving accounting and securities issues that are well beyond the purview and expertise of the Department of Labor. We would be very interested in exploring with you alternative structures and approaches that might address these concerns.

And, finally, while we believe it is appropriate to include a coverage requirement in H.R.3462, given the super option substantial tax advantages, we feel it critically important to provide flexibility in this regard, so employers will actually make use of this new option design.

Perhaps the bill's 50 percent coverage requirement could serve as a safe harbor while permitting employers to demonstrate that other coverage levels are appropriate, given the competitive needs of their particular industry and the demographics and needs of employees.

And, again, we would be delighted to work with you, Mr. Chairman, to develop those concepts.

Let me close, Mr. Chairman, by thanking you, Ranking Member Andrews, and the other Members of this Subcommittee, for your dedication to promoting the use of stock options for American workers. APPWP embraces the positive vision of the American workplace that H.R.3462 represents, and we look forward to working with you to enact new incentives that will extend stock benefits to many more working Americans.

With these steps, we can maintain, and even accelerate, today's exciting trend toward broad-based employee stock ownership.

Thank you, and I would be pleased to answer any questions at the end.






Chairman Boehner. Thank you. Mr. Byland?




Mr. Byland. Good morning, Mr. Chairman, and Members of the Committee. I thank you for the opportunity to testify before you today, and I am pleased to testify on the benefits of stock options for employees and to encourage you to expand the availability to others.

I appear before you today not as an expert in employee compensation law, nor as a tax expert, but rather a hard-working senior sales executive for a leading Internet video streaming company, INTERVU.

First, to put this into context, I would like to tell you something about our company. INTERVU provides web site owners and content publishers with the services for the delivery or streaming of live and on-demand video and audio content over the Internet. INTERVU's streaming media services are used for entertainment, news reporting, corporate communication, investor relations, and distance learning.

Over 70 percent of the most heavily trafficked web sites with streaming content use INTERVU. These include sites such as CNN, NBC, Microsoft, Turner, Excite@Home, and even the House of Blues. INTERVU has recently agreed to be acquired by Akamai.

It is my hope to some day see hearings such as this one readily available live and on-demand on the internet using INTERVU's network, and also archive the information in many formats and get a perpetual benefit for the information stored, dramatically increasing the return on the investment.

Think about all of the issues, large and small, that you deal with every day here on the Hill. Imagine being able to take testimony, ask questions of witnesses via the internet, and imagine being able to archive all of the proceedings on this issue, or on education reform, into a publicly available database.

Now imagine the student researching today's issues or even an important historical figure such as George Washington. Within a few keystrokes, all of the information developed over the years becomes searchable and streamed into his computer within seconds.

The job of sales that I do for INTERVU, I could do just as easily for Bethlehem Steel, Merrill Lynch, Xerox, or any other member of a good public company with a well-developed and well-compensated sales program. Before joining INTERVU, I was a Regional Sales Manager with Teligent, the premier wireless company in telecommunications. My sales team was the number one team in our region, well over 300 percent to budget, as we always exceeded our goals and were recognized as innovative and hardworking.

Prior to that, I was a Senior Sales Executive for Bell Atlantic. I was, again, number one in sales in the company, setting records of sales, product rollouts, and revenues. I have always looked at success as an outcome, not a goal. All one needs is a flawlessly executed plan on a day-to-day basis to succeed.

In addition to the excitement of working for an industry leader, one important reason I decided to work for INTERVU is that part of my compensation is stock options. The principal difference between the old economy and the new economy is that the new economy embraces a new way of doing business. Fundamental to the new economy is the offering of stock options.

I understand the legislation you are considering today will create a new class of stock option that would have the effect of increasing the value of the options for the covered employees by deferring the taxation until the options are sold. Employers, as they do now with non-qualified option plans, get a deduction for the value of the option. The new class of options will solve the biggest problem with the stock option plans today. Let me explain.

Today, if I want to redeem the value of my options I have earned, I first exercise them, convert the options to shares, and I sell them. I incur instant tax liability at a high ordinary rate. Even if I have owned the options over years, I do not qualify for long-term capital gains. The Tax Code hits me and employees like me hard.

Again, imagine the receptionist or a mailroom staffer at a high-tech company who has earned far more in stock options than in salary. Say the mailroom staffer wants to buy a house or send a child to college or retire. The way the option works is first it is exercised, converted to stock, and promptly sold. There is no intervening time to qualify for long-term capital gains. The Tax Code thinks the mailroom staffer is rich and taxes accordingly.

Now, meanwhile, in the boardroom, a senior executive for a company is rewarded with incentive stock options, or "ISOs", which are a different kind of option that most employees can obtain. They are non-deductible to the employer but which, under the many plans, get more favorable tax treatment.

The senior executive decides to exercise his or her ISOs and is able to qualify for taxation as a long-term capital gain, but the mailroom staffer pays the maximum ordinary income rate. Is this fair?

Thank you for proposing a new class of option, which blends the best of today's non-qualified option with the ability for the average employee to qualify for long-term capital gains. These new options will dramatically increase the value of options to all types of employees. I believe this new option will capture the attention of many companies from the old to the new economy. This is a value to our entire society when employees are treated fairly, compensated fairly, and taxed fairly.

Thank you for the proposal and for this hearing. This opportunity to testify before Congress has not come my way before, and I am most appreciative. Thank you for your invitation.




Chairman Boehner. And, Mr. Byland, we appreciate your taking time away from your successful sales career.

As a salesman myself, I understand pretty clearly that if you are not out knocking on doors, setting up appointments, and making sales, the income just doesn't quite come in the door. So I do appreciate your being here. My wife, as a new realtor, is finding this out as well. Because you are a realtor, and put a shingle out there, it doesn't mean people will come.

Mr. Von Bargen, we have talked about benefits for favorable tax treatment, if this super option were enacted, and the favorable tax treatment that the employer and the employee would both receive. But what I want to pursue is an outline of what those benefits are for the employee, and what those benefits are for the employer, as you see them?

Mr. Von Bargen. Well, let us take the employer first. Because the employer would get a tax deduction upon the exercise of the option, there is a financial incentive for the employer to put into place an option program to begin with, and then to implement that over time. That is, there will be no drag on the financial health of the company. In fact, it would be a slight benefit. So you put in place a substantial financial incentive for the employer to consider this kind of program.

For the employee, the benefit is even more critical, I think, because right now under a non-qualified stock option plan if the employee exercises his option he has to pay tax on the appreciation of between the market price he is now exercising the option at and his initial strike price.

That often is such a substantial hit to the pocketbook of the individual employee that he or she is simply forced to sell the stock immediately in order to pay the tax, which, of course, defeats the purpose of stock option plans and employee ownership.

What you want is that employee to be looking at his or her stock options in the company for whom she is working and say, "I am in it for the long haul. Every day when I go to work I am going to be making a contribution to increase the value of the company. And as that grows over the next three, five years, I am going to personally benefit from that."

And without the beneficial tax treatment, which this bill presents, more often than not, employees, especially the lower paid people, will be forced and are now forced to sell their stock and cut off that substantial benefit.

Chairman Boehner. I think all of us agree that if this type of option were enacted employees would tend to hold the shares longer, which many of us believe would be good for the employee; good for their family, and help us create a greater savings pool in our country.

On the employer side, yes, there is an incentive for them to do this. But do you believe that this type of option would enable employers to retain the services of their employees for longer periods of time?

Mr. Von Bargen. Again, I think the answer has to be yes, because if that produces a longer term commitment to hold the shares, and, therefore, to stay with the company, then the employer benefits from that, and the retention of employees over time will be significantly increased.

There is no question that in the entrepreneurial companies that we work with, that is an explicit part of the design of their option programs. Most of them have elaborate vesting schedules where options are granted. Then there is vesting, which outlines the percentage of shares, or options, that can be exercised over time.

And the whole strategy is to keep the employee connected with the business. And I think this bill would accomplish the same thing.

Chairman Boehner. Mr. Byland, talk to me about your specific case, if you don't mind, about options that have been granted to you and how you have dealt with that.

Mr. Byland. Regarding the options I was granted, being just acquired is nice because it accelerates the vesting period, which is nice. But I believe most people think when you get options that one magical day in the very near future they vest immediately and you take the cash and retire to the islands, and it is not true. Most of them are four and five

year plans.

Once you have options it creates a different cultural atmosphere in the workplace. Nobody says, "it is not my job, or I can't do that." Everybody takes ownership, from the mailroom, the receptionist, to my boss, the President of the company. I mean, everybody comes in early, stays late, and works weekends. I mean, our goal is to succeed, and every day we succeed, and we watch it because we have got the stream of the stock ticker. We see what it is doing, and there are guys who calculate what they are worth today. Ninety percent of it is paper.

But at some point you know down the road, when you have developed a winner in the industry, you will be there to share in the profits of it.

Chairman Boehner. In another hearing on a related but different subject, there was an employee who said that they worked to extend, for the longest possible time, the exercise date because they really didn't want to have to exercise the option, pay the tax, and take the money. They wanted to see the value of that grow.

Do you run into this with some of your co-workers?

Mr. Byland. Completely. If I, as the employee exercising the options, treat it as a capital gains or as a long-term investment, not take it out, I would be more encouraged to do it, dramatically.

Chairman Boehner. Thank you. My time is up I think.

We have got votes on the floor, for those of you that aren't familiar with those buzzers and bells going off. I think we will go to the floor and vote, and try to resume the hearing in about 15 to 20 minutes.

The Committee will stand in recess.





Chairman Boehner. The Committee will come to order and resume the hearing on the Wealth Through the Workplace Act.

And with that, the Chair recognizes the gentleman from New Jersey.

Mr. Andrews. Thank you, Mr. Chairman.

I want to thank each of the witnesses for their very insightful and informative testimony this morning.

Mr. Byland, let me congratulate you on a job well done, and let me thank you for being among the many people that are the reason we have a budget surplus. I really do appreciate the fact that the reason our fiscal health has improved so much is because a lot of people like you working in all kinds of occupations have gone out there and worked very hard and paid a lot of taxes and moved us from the red to the black. We appreciate that. We really do.

Mr. Byland. You are welcome.


Mr. Andrews. You are representing 250 million people here today.

I thought that you made an excellent point about the tax treatment of options when exercised by an employee. And I thought that your example of a receptionist or an entry-level person is a good example of that.

I did a little quick calculating. If a person has been with a firm for 15 years, let us say that he or she went to work for a company in 1986 and was fortunate enough to work for a company that had this kind of option plan. Each year the employee got a little bit of option granted, and after 15 years of employment now makes $30,000 a year, someone who is very much at the bottom level but gone up incrementally.

If the person had a basis of $10,000 in those options, the strike price added up to $10,000, and they wanted to cash in the options because they have education needs for their children or they have a family need, they would have a $20,000 gain; $30,000 in value minus $10,000 in basis. Under the law as it stands today, they would pay at least

about $5,600 tax on that gain, and maybe more if it pushed them into a higher bracket.

Under the bill that the Chairman has put forth, they would pay $4,000. That is the difference between the capital gains tax rate and the rate as ordinary income. That is $1,600 difference on a $30,000 cash-in. That is very significant, and I think for someone who is trying to finance his or her child's education or deal with a family matter, that is very, very significant. And obviously those numbers would grow the higher a tax bracket becomes or the larger the savings goes.

I thought you made a good point that very modest holdings for someone at an entry-level position are negatively affected by the present law and could be significantly improved by what the Chairman has proposed. I wonder if you could comment on that?

Mr. Byland. I agree completely. I think the bill helps the guys like myself and the receptionist, and the people out there in the trenches every day, because we get shares but we are not the CEO where we have a million shares. So he has got to pay $50 million tax on $100 million. I am not even sympathetic to that.

Mr. Andrews. That is because you want to be one of those guys one day, right?


Mr. Byland. I mean, our goal is just to be comfortable, and not be a burden on our families when we retire or a burden on the government through Medicaid and all of that. It is just the security of retirement living and doing your job well and being the best at what you do. So the bill takes the masses and benefits us.

Mr. Andrews. We appreciate that. And I want to just sort of jump off of that with Ms. Greenman and Mr. Von Bargen.

Ms. Greenman, I read in your testimony that you have some discomfort with ERISA regulation of this employee benefit, if we treat it that way. Do you think that the ERISA non-discrimination, top-heavy principles, should apply to this employee benefit?

Ms. Greenman. I think they should be applied very carefully, as I mentioned in my testimony where what we advocate is flexibility in terms of setting a minimum threshold, because options, as we envision them, are really part of a total compensation package. And there are lots of different elements to that package.

So, for example, at Honeywell we provide cash compensation. Some employees are eligible for short-term cash incentive compensation. We have retirement benefits. We have a 401(k) plan. And options are available as another piece of that total package. And so when you look at setting an absolute floor in terms of top heavy or in terms of what is necessary, you think about options.

What you want is buy-in. You want to align the interests of employees with those of shareholders. You want to attract and retain employees. But not all employees have the same interests, and so what will attract and retain some employees will not be significant to others.

Mr. Andrews. What you said is that there ought to be careful application of some regulations to this plan.

Ms. Greenman. Right.

Mr. Andrews. That is a little inconsistent I think with being concerned about placing this under ERISA-type regulation, because if there is going to be regulation somebody has to be the regulator, right? Doesn't it make sense to take advantage of the existing DOL ERISA structure than reinvent the wheel?

Ms. Greenman. The concern that we have, and as I said, we would be glad to work separately, because I think it is a complex issue, is that options really involve multidisciplinary areas of expertise. There are accounting issues that are particularly significant. There are securities laws issues that are very significant, and there is a risk of duplicative and potentially even conflicting regulations.

Now, I would embrace the suggestion made by Mr. Von Bargen regarding education of employees, that when informing employees as to what options are all about, we inform them about all of their employee benefits.

Mr. Andrews. I am certainly sympathetic to that. The Chairman's bill and the bill that I introduced both rest on the premise that we want to make this attractive to employers and not unattractive, while at the same time maintaining proper fiduciary and protective elements.

Mr. Von Bargen, you used the phrase "democratization" in your testimony, which I assume means broadening participation as much as possible within the context of this voluntary structure.

What do you think the most effective tools are for that kind of democratization?

Mr. Von Bargen. In designing option programs, provide incentives both for the employer to include as many employees in that program as possible, and for the employee to see real personal benefit in participating in a program. Therefore, you have both an incentive for the supply of options and a strong demand by employees.

Mr. Andrews. Do you think that the ERISA non-discrimination laws should be applied to this benefit?

Mr. Von Bargen. I am not sure how to answer that. In most entrepreneurial companies, that is not a major issue.

Mr. Andrews. It is 100 percent in the high-tech companies.

Mr. Von Bargen. Right. And in the survey I cited, 83 percent of the companies offered stock options to every new employee. Period. So typically, in an entrepreneurial company, that is not a major issue. But I am not an expert on the non-discrimination provisions to be able to speak broadly on that.

Mr. Andrews. Well, I am not sure anybody is. I am sure the Chairman is leaving the record open for further thoughts about that question because I think it is important.

Ms. Greenman, I have just one additional point on that question. When you look at stock options, I think you have got to look at the super option that is the subject of the proposed legislation, in comparison with other types of options as opposed to looking at those options by comparison with, for example, tax qualified retirement plans, because there are different kinds of benefits.

And so if you create a regulatory structure that looks more like a defined benefit plan than it does like a stock option, I think that provides a disincentive for employers to go this route with broad-based options. If you look at options it is a type of option as opposed to a retirement benefit, which is subject to many more complex rules and requirements.

Mr. Andrews. This is my final point. One of the areas that have also been talked about is the extension of this option strategy for closely held companies.

Ms. Greenman. Right.

Mr. Andrews. I agree with that. I think it ought to be extended. I think there are management issues and there are ownership issues. But I think to limit this to publicly traded companies would be a mistake.

Having said that, the potential for abuse of this tax favor treatment, which I think the huge majority of employers would not be prone to abuse, but for those who would, the potential for abuse of this kind of tax law is certainly greater in the closely held companies than it would be the publicly traded ones. So that is why I raise these questions about non-discrimination and top-heavy brass.

I start from the premise that a rare and small percentage of employers would use this as an abusive tool. The huge majority would use it for positive benefit. But we also want to try to surgically prevent those who would subvert the purpose of this bill, which is to broaden wealth, to create a tax shelter for themselves and avoid their responsibility.

Ms. Greenman. I believe that H.R.3462 does address that by excluding larger shareholders. The way the bill is structured, I do not think that it is possible.

Mr. Andrews. There is an entire bar that makes things like that possible by good tax planning.

Thank you very much.

Chairman Boehner. Mr. Petri?

Mr. Petri. Thank you. Thank you for your testimony.

I have a question. I am not an expert in this area, as our Chairman and Ranking Member Mr. Andrews are, but what would be wrong with providing that people didn't have to pay a tax when they got their stock? I guess that is the problem. If they put it in an IRA or a 401(k), or some such thing, that would give them the advantage also of getting some diversity.

I know you want to tie people to the company, but we want to look for stability in retirement. And companies rise and fall like meteors, and they are probably about to fall in this area quite a bit. And you want to give people some way out if they are prudent and trying to protect themselves.

So what would be wrong with that as a reason? If they needed the cash now, then they would pay their tax as they would any time anyone sells a piece of stock and turn it into a house or something else? But if they were using it for long-term family planning and security, which is something we want to encourage, then they could roll it into one of these retirement programs and diversify or buy a mutual fund, or do whatever they wanted to with it, or keep it in that stock. That would be their decision.

Has that been considered? Is there something wrong with that approach?

Ms. Greenman. I don't think there is anything wrong with that approach. I think that it is not within the purview of this particular bill, but certainly there are innovative strategies currently involving use of options and 401(k) plans as well. The possibility is certainly worth exploring legislatively for providing additional vehicles for people to take option exercised gains and move those gains into some kind of tax qualified vehicle.

So I think it is an excellent suggestion and one that is worthy of attention.

Mr. Von Bargen. I would second Jane's comments there, especially to the extent that we want to encourage employees to use their equity ownership in the companies they work for to begin thinking of it as something that will help with retirement security concerns. I think to the extent that you provide them incentives to do that by allowing them to roll over into an IRA or a 401(k), would be an interesting thing to pursue.

Chairman Boehner. Mr. Ballenger?

Mr. Ballenger. Thank you, Mr. Chairman.

Chairman Boehner. Mr. "ESOP."


Mr. Ballenger. Yes. Luckily for me I had a chance to talk to the panel here during the break. And just for the benefit of Mr. Andrews, I would like to bring up a discussion of what he was talking about as a privately owned company. My ESOP is part of a privately owned company, and one of the real disadvantages you have in the thing is you have a limited number of shares.

I can't all of a sudden give somebody some shares this year, unless I decide to split all of the stock, and there is no advantage in a private company to split your stock, so it really becomes kind of a difficult thing to do to fix a situation like that.

I just was thinking. We had our annual stockholders and director's meeting in December, and one fellow who showed up had retired about 10 years ago, and I thought he was a nut. He held on to his stock. It wasn't a bad investment. But he comes to the annual stockholder's meeting. He has got six shares and he likes to sit there and ask us what we are doing, and we have to sit there and explain it to him.


No. It is really kind of a nice situation.

Chairman Boehner. But democracy is a tough thing, you know.


Mr. Ballenger. Yes, right.

Mr. Andrews. How can I buy some of these shares?


Mr. Ballenger. Well, we had a lady retire just this past year, and she had been at the bottom of the pay scale, and she was unwilling to be promoted. There are just some people who don't want to get promoted. I think she worked for us 15 years. She had $60,000 in her stock account. And that is another thing, with ESOPs; you have to guarantee to buy back because otherwise there is no market for it.

I am just curious. If we offer the opportunity for an annuity or something like that, you can either sell it for cash and pay or get an annuity. There are all kinds of strange things that pop up with an ESOP. But I still go right back to what you all were saying.

It is only as good as the explanation to the employee, because I don't care if you are somebody on the Internet and all of this other crazy stuff where the stock just goes crazy, you have got to explain to the employee the value of the stock, how to value the stock, and the value of holding it and the fact that the guy that screwed up and really ruined the whole shipment of goods, that was your money he just messed up. And don't do it again. We don't care about management, we are going to fix you ourselves, if you don't straighten this thing out.

In my company they own 35 percent of the company, and everybody in it owns a share or two, or some people own substantial shares because they have been there so long. The only thing I can see where this would be an advantage or might have a conflict of interest is if I went public all of a sudden. But don't worry; I am not going that way.

So I don't have a conflict of interest, but I do think it is a wonderful idea to somehow get across the point that the more people that we can get that own a share of our economy, and are in a position to profit from our economy, the better off our free enterprise system and our government will be.

And I would like to thank Mr. Von Bargen for explaining to me that it is Mr. Mellinger, not Mr. Ballenger, that is your boss.

Mr. Von Bargen. That is correct.

Mr. Ballenger. When the stock is issued to you, Mr. Byland, and suppose you exercise it, and so forth, it has no other strings to it, and you can buy or sell it? Once you have paid the taxes and you own the stock, is it yours to play with any way you want to?

Mr. Byland. Correct.

Mr. Ballenger. Right. Of course, in our case, you buy your stock and you sit on it until you either retire or die. And it really is a retirement plan. I don't know whether that specifically would apply to this.

Chairman Boehner. Mr. Ballenger?

Mr. Ballenger. Yes, sir.

Chairman Boehner. I think one of the issues that Mr. Andrews brought up centered around trying to provide these types of options in a privately owned company or closely held company, which raises a question of, how do you value the stock?

In an ESOP, there have been some challenges over how people have valued the stock. In your particular case, I know you are not a witness here at the hearing,


but in your particular case, how does your company go about valuing the stock for the purposes of the ESOP and the employees' share of the ownership?

Mr. Ballenger. Twenty years ago, and this is the law with an ESOP, you have got to find somebody that is a qualified evaluator. And I will be frank with you, if my stock was valued the way they do on the stock market; I sure would sell it immediately. But the truth of the matter is the evaluator goes back and gives you five years of history that you used the profits and compares the price per share and earnings per share.

And he is a certified evaluator that we paid I think $5,000 or $10,000 a year to do this. And each year he comes back with his pitch. And like I say, if eight times earnings means anything to anybody, that is about what it has been coming out year after year.

But the way the new evaluations are done; I mean, there is no evaluation in the Internet. You know, if you have got a good name, and you can dream a little bit, the world is your oyster.

Chairman Boehner. But my point is that if the formula is always eight times earnings regardless of what is happening in the publicly held market, I would suggest both you and your employees are not getting the full value.

Mr. Ballenger. No, it is not.

Well, we have good years as well as bad years, and the great advantage you have is that it is spread over 5 years. So if you have two bad years, say in 1992 and 1993, well, you have got to go five more years to get rid of those two years as part of your average. So your income per share increases, and you knock off the years 5 years back. So sometimes, like this year, we have an unbelievably good year, but we had two bad years that we were just trying to knock off in the average here.

So all of a sudden you get more than eight times earnings, but it is a compounded situation, and it is a very super conservative way of doing things.

Chairman Boehner. Mr. Von Bargen?

Mr. Von Bargen. Mr. Ballenger is an expert on ESOPs, but one of our Commissioners is Dr. Bob Beyster, who is the founder of SAIC, which is Scientific Applications. And they are an ESOP-owned company. And he established an institute called the Foundation for Enterprise Development, which specializes in ESOPs.

I know that they are constantly struggling with some of the issues that you have raised. To the extent that we can be helpful in getting you together with them, and they can add any value to your already extensive store of knowledge, we would be happy to do that.

Mr. Ballenger. I would love to. I will be frank with you; there are all kinds of problems that pop up in these ways of doing things. There are ten or 15 unintended consequences, shall we say, that you didn't expect to occur that do occur. I am sure it is going to happen the same way in some of the regular stock that we are talking about now.

But I would greatly appreciate it if you would tell him. I would love to get in touch with him.

Mr. Von Bargen. I would be happy to do that.

Mr. Ballenger. Thank you, sir.

Chairman Boehner. Ms. Greenman?

Ms. Greenman. If I may, we would certainly agree with the point that Mr. Andrews made about not limiting this kind of vehicle to publicly traded stock companies, and think that the example of ESOPs provides a very good backdrop against which to work towards solving those problems. And we, as well, would be glad to work with you in order to come up with some suggestions.

Chairman Boehner. Well, let us go to the issue of flexibility, an issue that I have struggled with over the last several years as we were putting this together. There are several frameworks. I mean the purpose here is to encourage more employers to offer more stock options to more of their employees.

You want it done fairly, you want to make sure that a broader cross-section of employees are receiving these stock options, and it would be easy to say, "Well, if you want to take advantage of the super option, you must include all of your employees." Certainly, I would like to see that. I would like to say that.

The problem is, if you put that in the statute, then it provides a large disincentive for employers to want to proceed here because it is clear you are going to cover all of your employees.

Now, the new startup companies within the new economy that do that are fine and wonderful. I don't want to call it the old economy, but I would argue that our focus is on the existing economy to get more employers there more engaged in this. And I think that it was our collective judgment that if you put a 100 percent requirement there you would, in fact, provide a disincentive for employers to proceed.

We looked at the non-discrimination language, and that has got its set of problems as well. So we settled in on a 50 percent requirement. But I think the point I want to make is that we may have to come and revisit that particular point as we collectively go through these hearings and try to determine, how we best encourage employers to provide this option? How do we best get more American workers covered under it? So I just want to make that clear, that it is open for discussion.

Mr. Ballenger left. I wanted to ask him another question, even though he was not on the witness panel, regarding the issue of education.


I wanted to ask Mr. Ballenger how he goes about educating his employees. Under an ESOP, it is even more complicated than what we are talking about here.

But what kind of strategies, Ms. Greenman, would Honeywell engage in to educate their employees about not only stock options that you already grant, but also your other employee benefits? As you pointed out, this is part of a total package for your employees.

Ms. Greenman. That is an excellent question, and thank you for giving me the opportunity to respond. We at Honeywell have spent considerable time, expense, and effort to try and educate our employees about employee benefits. If you think about the purpose of employee benefits, which is to attract, retain, and motivate employees, they don't do anyone any good, particularly the employer, if employees don't know what they are and understand their value.

And so there are various ways in which we communicate that go well beyond the minimum statutory and regulatory requirements. We have got periodic newsletters that are put out that describe to employees what is happening with their plans. We have got reports about the defined contribution savings plans arena and how their investments are doing.

We started over the last two years something called a Total Value Statement, which is an individualized benefit statement that pulls together a description of all of the various benefit programs. It has required a tremendous amount of work and effort, as you can imagine, to lay out for each employee what their benefits are, and the personal value of the benefits that he or she has earned to date.

We have telephone service where anyone can call an 800 number and ask questions, either in general or in particular, about their benefit programs. We have engaged a planning company as a consultant so that we provide retirement planning seminars for employees. Employees can pick up the phone, call, ask a question, and be referred to experts in the area, for personal planning needs in addition to regular meetings whenever there is a change in any kind of benefit program, explaining exactly what is going on.

Chairman Boehner. Thank you. Mr. Andrews?

Mr. Andrews. I have no further questions. Thank you.

Chairman Boehner. I want to take this opportunity to thank our three excellent witnesses today for your testimony. It certainly was valuable. We are going to continue to pursue this subject.

As I mentioned earlier, the witnesses and Members have 14 days to submit additional testimony if they would like to. With that, the Subcommittee will stand adjourned.

Whereupon, at 12:06 p.m., the Subcommittee was adjourned.