For example, if an executive is to receive 365 options during the year, one option would be granted on each day of the year. Any backdating, spring-loading, bullet-dodging or any other game that benefits awarding one option on one particular date will necessarily hurt the other options, thereby offsetting the effects of manipulation. in order to make them more valuable, it seemed like a problem that would come and go quickly... What’s distinctive about this one is that the benefits companies got from backdating were so small.Never, you might say, have so many cheated so much to gain so little.The most common stock options are known as “at the money” options, which let you buy the company’s stock at the price that it had on the day of the grant.They’re valuable only if the stock price rises after you get them.The Dating Game, by James Surowiechi, The New Yorker: ..
As shown above, the data provides evidence of manipulation by executives for surreptitious personal gain on a broad scale.
Who would be so arrogant to be still backdating their options?
It has been exactly ten years since the Wall Street Journal’s exposé on “lucky CEOs.” The intriguing question though is whether the executives could resist temptation for ten years. We find that despite all the reforms enacted in response to the backdating scandal of 2006, manipulation of stock options as a form of incentive compensation is once again alive and well. Backdating an option refers to the practice of fraudulently picking a date in the past when the stock price was lower than today as the grant date of the option.
In the case of backdating, the only crime was the coverup. In-the-money options—but not at-the-money options—had to be recorded as an expense, which drove down reported earnings.
Backdating allowed companies to reward employees with in-the-money options while getting the favorable accounting treatment of at-the-money options. Classifying the options properly would have lowered the number in the “earnings” box, and so C. O.s assumed that it would also drag down the company’s stock price.