July 19, 2006
The backdating options scandal continues to grow. Now over 2,000 firms may be involved. Moreover, the scandal is growing raunchier as newspapers have discovered that 9/11 provided a prime opportunity for backdating. Journalists continue to misunderstand the crisis -- it is a violation of disclosure requirements and a tax fraud to call "in the money" options "at the market" options. In the money options have an exercise price below market price at the date of grant; at the market options have an exercise price equal to market price at the date of the grant. It is not illegal to grant "in the money" options as long as a firm discloses they are in the money and the recipient pays the proper tax. The disclosure advantage of lying was largely eliminated by the new rules on expensing options. The ability to lie was largely eliminated by the new SOX rules requiring disclosure of executive option grants within two days of the grant.
Lawyers, who should have sniffed out the practice (or may have even participated), are now cashing in as law firms are racking up the billing hours defending firms that may have undertaken the practice.
I am always amazed that executives who make $10 million a year and up legitimately will nickel dime their companies on the small stuff. They have their lawns mowed and their gifts of flowers to secretaries paid for by the firm. The options scandal is more of the same. Most of the executives merely saved some taxes with backdating the options and the taxes saved were a pittance of their salary. At most the executives may have felt they could get paid a little more if their compensation was hidden, but given the power of companies to set enormous salaries even this was probably not more than face saving stuff.
I have an inherent distrust for high paid executives that nickel dime their own companies -- these folks are cheaters and are likely to get their companies into trouble on the big stuff. An executive that backdates options should be shown the door, before his cheating heart hurts the company on stuff that matters.
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Not sure if a 100% of these backdating issues were driven by greed and need to nickle and dime as you put it. Some of it was genuine lack of knowledge, guideline and process. You are implying everyone is guilty unless they are proven otherwise. Very weak argument.
Posted by: Mukund Mohan | Jul 19, 2006 2:53:18 PM
You have to read this research piece on the CEO compensation at top 100 tech companies and the conclusions from the report. It says there is an inverse correlation between pay and performance.
Posted by: Mukund Mohan | Jul 19, 2006 10:36:33 PM
1. This is a very elegant analysis of what the real legal problem is, as opposed to the instant reaction that this is akin to fixing a horse race.
2. But, considering the problems Brocade had, for example, in hiring employees, I am not inclined to accept that the conclusion follows: that all cases of back dating were to advantage the CEO, or some other high placed executive. Even though I remain sympathetic to the truth of the conclusion of the argument.
Posted by: Michael Webster | Jul 20, 2006 2:02:23 PM