Definition of option backdating
But are options really as great for all parties as many have assumed?The stock option “backdating” scandal has implicated several (mostly technology) companies over the past few months.Lie and Randall Heron of Indiana University’s business school, examined almost 40,000 grants during that period.
The practice of backdating options is not illegal as long as it is disclosed to shareholders.
Backdating is perpetrated by “cherry-picking,” after the fact, the lowest points the company stock traded throughout the previous year when calculating the exercise price of option grants.
The exercise price of an option is crucial because it is the price the executive or employee option holder must pay to the company when exercising options in return for newly issued shares.
This fact is often used as a reason to downplay the seriousness of the issue.
You’d think that shareholders wouldn’t tolerate the use of accounting sleight of hand to compensate executives while bypassing the traditional “selling, general, and administrative” line in the income statement.
Instead of using excess cash to buy back stock at a short-term discount, a long list of blue chip companies used the post-Sept. A recent Wall Street Journal article entitled “Executive Pay: The 9/11 Factor,” describes the sequence of events (my emphases):“A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock market decline, to give executives especially valuable options.