All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.
Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.
“While it seems to be a natural choice to fire the executives/directors who should be responsible for option backdating, only one-third of the 141 firms we surveyed elected to do so.” Zhang and her co-author, Margarethe Wiersema at UC Irvine, theorize that the decrease in executive/director turnover over the course of the scandal can be attributed to companies using other companies’ similar misconduct to justify their own misconduct.
Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term.
As a consequence, the option is immediately profitable, or “in the money,” to the option holder.
Dozens of companies – including United Health Group, Comverse Technology, Vitesse Semiconductor and Affiliated Computer Services – have caught the eye of the Securities and Exchange Commission and the Department of Justice for the timing of their stock option grants.
The question: did these companies backdate options grants – and falsify records – to make them more lucrative for their top employees?
That exercise price, or strike price, usually takes one of three forms: the closing price on the day of the grant; an average of the highs and lows of the day; or the closing price from the previous day.
The lower the strike price, the greater the potential for making money when exercising the options.
The newspaper is published in the broadsheet format and online.
The Wall Street Journal is the largest newspaper in the United States by circulation.
“If accountability were the basis for their decision-making, we should have observed a more consistent pattern of companies choosing to dismiss their executives/directors over time.” Zhang says that attention from the media, as well as investigation by the Department of Justice and/or the Securities and Exchange Commission, plays an important role in pushing companies involved in the scandal to fire their executives and directors.
“This attention serves to counterbalance corporation boards’ tendency to justify their misbehavior with others’ misbehavior,” she says.
Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.