Holding companies to take profit hit on new options rule

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Burying stock options in financial footnotes soon will no longer be an option, and more companies-including Omnicom Group-are starting to report options as an expense. Interpublic Group of Cos. next week likely will make a similar move. The bottom line: Profits will take a hit as companies factor in the expense. The accounting changes probably will lead to some shift in the way marketing-services firms compensate executives.

It's a global issue. All public companies in the European Union-including marketing-services firms WPP Group, Publicis Groupe, Havas and Aegis Group-must adopt international accounting standards effective Jan. 1 that require expensing of options. U.S. standards are still catching up, but experts say it's likely U.S. companies also will be required to expense options beginning in 2005.

"The move to expense options is generally a corporate governance-related issue of companies wanting to give shareholders a less distorted view of what's going on," said Joseph Stauff, a Schwab Soundview analyst. "More information is always welcome, especially with the ad agencies." Omnicom last month said it would voluntarily begin including options as an expense starting this quarter. It will restate results back to 2002 to show the cost of options.

Interpublic move

Interpublic likely will announce a move to report options expenses when it releases year-end results March 9. Interpublic declined to comment since it's in a quiet period leading up to its report. Grey Global Group beat its bigger rivals: It began expensing stock options in January 2003. Until now, companies had reported options only in financial-statement footnotes.

Marketing-services firms have been far less reliant on options than tech firms, which have been forced to pare options giveaways. But options still mean millions of dollars of shareholder value passes to agency executives in incentive compensation. Omnicom had 2002 net income of $643.5 million-but that didn't include $59.8 million of "additional stock-based employee compensation cost" such as options.

Stock options can dwarf salaries. For example, Allen Rosenshine, chairman-CEO of Omnicom's BBDO Worldwide, last fall exercised options to buy 60,000 shares for about $12 each and sell them at the market price of about $80, giving him a profit of $4 million. That's far more than his 2002 salary of $985,000. Mr. Rosenshine declined to comment; BBDO deferred to Omnicom, which declined to comment for this story.

Options became an issue following Enron's collapse, accounting scandals and the uproar over fortunes executives made in the bull market. Coca-Cola Co. began to expense options in 2002, and many companies followed.

Microsoft Corp. last year killed options and replaced them with a less lucrative plan. Mr. Stauff said agency companies probably would make less use of options going forward. "Compensation levels aren't changing," he said. "It's just that people are now being compensated in other forms."

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