Diet legalizes stock options

Legislation to legalize stock options cleared the Diet on May 16, setting the stage for many Japanese corporations to introduce in June the highly lucrative system of remuneration available to many U.S. corporate executives and employees.

A bill to amend the Commercial Code to remove existing restrictions on such a practice was passed by a plenary session of the Upper House in the morning. The bill passed the Lower House on May 8. The revised Commercial Code will take effect June 1.

The deregulation move, urged by corporations for years, is expected to drastically raise the remuneration of Japanese executives and employees at well-performing firms. It is also expected to encourage head-hunting among rival firms.

Firms introducing the stock option or similar incentive programs include Toyota Motor Corp., Daiwa Securities Co., Advantest Corp., and Orix Corp.

At many U.S. corporations, stock options are part of an employee’s compensation package. One prominent example is the case of Chrysler Corp. Chairman Robert Eaton, who collected $4.4 million in 1996 by exercising his option, according to U.S. news reports. The practice is also common in Europe.

The stock option is a company perk that gives executives or employees the right to buy shares of company stock at predetermined prices. The incentive is for employees to work harder, bringing profits to the company and in turn raising the value of its stock.

Once the stock appreciates beyond the incentive price, workers can exercise the option to buy stocks at that price, regardless of how much it has risen.

If the company’s performance is good, workers can turn a profit by buying stock below market value and selling it later.

In Japan, however, stock options are virtually banned as the present Commercial Code prohibits companies from holding more than 3 percent of their issued shares beyond a six-month period. The ban has been in place to prevent companies from manipulating stock prices. The new law will permit companies to hold up to 10 percent of their issued shares for use in stock options.