Is worker stocks tactic flawed?

WASHINGTON — Amid investor concern that it is violating the spirit of accounting rules, Zions Bancorp has begun valuing its employee stock options using a controversial approach that relies on markets to set the price.

The decision by the Salt Lake City bank holding company may mark a critical new step in a battle over how to value employee stock options. After U.S. accounting standard-setters in 2004 voted to require companies to begin treating stock options as an expense, companies began seeking Securities and Exchange Commission approval for new techniques that would lower those costs.

Zions entered the picture with Esoars, or employee stock option appreciation rights, a new product that uses an auction to determine the value of employee options. Zions said last week that the new technique translated into a 14 percent decline in the cost of its employee stock options compared with the method it previously used.

The bank hopes to make money by arranging for other companies to conduct auctions of Esoars to value their own employee stock options.

SEC Chief Accountant Conrad Hewitt in January gave a partial blessing to the product but wrote that an auction conducted last year may not have been sufficient. Zions conducted a new auction in May and last week said that its financial statements will now value employee stock options based on prices determined by Esoars.

Evan Hill, a Zions vice president who helped develop the Esoars, said Friday that the company hasn't received news about whether regulators have approved the use of the product.

Some investors fear that the SEC's silence represents tacit approval for a technique that they say is flawed. The concern plays into bigger fears that regulators, who have been discussing the merits of principles-based accounting standards, might not respond when faced with a violation of principles.

"It appears that the SEC staff has agreed to permit Zions to use the price of Zions Esoars to value their employee stock options for financial reporting purposes," Jeff Mahoney, general counsel of the Council of Institutional Investors, which represents big investors, wrote in an e-mail. "This apparent staff decision is surprising and disappointing."

"I see a foul with Zions Esoars, and I feel obligated to call it," Mahoney added. "Others who support principles-based standards, including the SEC, should either support me or explain to me why I am wrong."