Backdating of options

Lillard, the former member of Stryker’s stock option committee. 11 and say, ‘Gee, how can we take advantage of this? Brown said that for the past 10-12 years, the company, to compensate for a relatively small number of options given to executives, has tried to ‘pick what we think would be the low point of the year.

That’s what we’re gunning for.’“Stryker’s option grant came on the lowest closing stock price for the second half of the calendar year. Brown said he believes that he called both members of the stock option committee on Sept.

Instead of using excess cash to buy back stock at a short-term discount, a long list of blue chip companies used the post-Sept. A recent Wall Street Journal article entitled “Executive Pay: The 9/11 Factor,” describes the sequence of events (my emphases):“A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock market decline, to give executives especially valuable options.

The SEC and other federal authorities are currently investigating more than 50 companies suspected of illegal, undisclosed options backdating practices, and the first criminal charges relating to these practices are expected shortly.

The practice of backdating options is not illegal as long as it is disclosed to shareholders.

But long-term executive/shareholder interest alignment gets thrown out the window when unforeseen circumstances cause a temporary crash in a company’s stock.

Executives can profit quickly at shareholders’ expense in such instances.

This fact is often used as a reason to downplay the seriousness of the issue.

You’d think that shareholders wouldn’t tolerate the use of accounting sleight of hand to compensate executives while bypassing the traditional “selling, general, and administrative” line in the income statement.Stock options are promoted by their supporters as the most effective way to align executive and employee interests with those of shareholders.They are supposed to transform executives from fly-by-night plunderers in the mold of former Tyco or World Com executives into rational leaders who make prudent, long-term-oriented decisions with shareholder capital.Lie and Randall Heron of Indiana University’s business school, examined almost 40,000 grants during that period.It found evidence of manipulation involving 23% of those grants between 1996-2002, when a new rule required executives to report grants within two business days of receiving them — making backdating far more difficult to achieve.Backdating is perpetrated by “cherry-picking,” after the fact, the lowest points the company stock traded throughout the previous year when calculating the exercise price of option grants.

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