Executive stock option plans backdating motivation

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Now, another academic research study, Right on Schedule: CEO Option Grants and Opportunism (previously discussed in the ), suggests that companies (the authors blame the CEO) may be releasing negative information before an option grant (“bullet-dodging”) or holding back positive information until after the grant (“spring-loading”).

The move to scheduled options solved some problems but created others.

The author of the academic study who is credited with focusing regulators on this issue estimates that at least 10% of “at-the-money” grants of options to CEOs between 19—before Sarbanes-Oxley shortened the reporting period for option grants—were backdated.

SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.

SEC investigations, lawsuits, terminations, and even criminal prosecutions followed in the great stock option backdating scandal.

(All this occurred before the current deadline for filing Form 4s, which made backdating possible.) The number of executives and board members who seemed to think that backdating was okay was truly astounding.

A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.

Option grants to new employees have their own set of backdating issues.Although these practices involve different types of conduct, both create problems because the date when the exercise price is set is not the same as the date on which the option is awarded.Another scenario involves the allocation of grants to employees from an authorized pool.Options that are granted at less than fair market value result in higher levels of compensation expense.Before FAS 123R, generally only options granted below fair market value resulted in any compensation expense.

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