Option backdating statistics
Traditionally, stock option plans have been used as a way for companies to reward top management and "key" employees and link their interests with those of the company and other shareholders.More and more companies, however, now consider all of their employees as "key." Since the late 1980s, the number of people holding stock options has increased about nine-fold.In options backdating, executives benefit from hindsight.Companies look back over their stock’s performance and cherry-pick a low point on the stock chart to set the options price, thereby boosting the value of the options—and the executive’s portfolio.If the company sets the prices of the options grant well below the market price, they will instantaneously generate an expense, which counts against income.
However, when granting options, the details of the grant must be disclosed, meaning that a company must clearly inform the investment community of the date that the option was granted and the exercise price. In addition, the company must also properly account for the expense of the options grant in their financials.(To learn more, read .) In short, it is this failure to disclose - rather than the backdating process itself - that is the crux of the options backdating scandal. To be clear, the majority of public companies handle their employee stock options programs in the traditional manner.That is, they grant their executives stock options with an exercise price (or price at which the employee can purchase the common stock at a later date) equivalent to the market price at the time of the option grant.You go to collect your winnings, and there you see another bettor—the horse’s trainer!—swagger up to the cashier, place a huge wager on the race that was just run and collect a windfall. That’s essentially what happens when companies backdate corporate stock options for their executives.