Executive stock option plans backdating motivation

19-May-2019 12:12

Now, another academic research study, Right on Schedule: CEO Option Grants and Opportunism (previously discussed in the ), suggests that companies (the authors blame the CEO) may be releasing negative information before an option grant (“bullet-dodging”) or holding back positive information until after the grant (“spring-loading”).

The move to scheduled options solved some problems but created others.

Options granted as of the commencement of employment based on the market price as of the date of acceptance may be problematic if the plan does not permit below-market grants or the grant is not treated as a discounted option for accounting and tax purposes.

We find evidence that some executives respond to this perverse incentive: Firms’ stock prices tend to be temporarily low on the grant date.

Even though no documents are backdated and there may be no intent to select a lower exercise price, backdating issues may arise if the stock price increases before the corporate formalities have been completed.

State law and bylaw provisions as to the time of effectiveness of unanimous consents may be helpful in evaluating these issues. It is important to note that most of these practices are not inherently illegal.

SEC investigations, lawsuits, terminations, and even criminal prosecutions followed in the great stock option backdating scandal.

(All this occurred before the current deadline for filing Form 4s, which made backdating possible.) The number of executives and board members who seemed to think that backdating was okay was truly astounding.

We find evidence that some executives respond to this perverse incentive: Firms’ stock prices tend to be temporarily low on the grant date.Even though no documents are backdated and there may be no intent to select a lower exercise price, backdating issues may arise if the stock price increases before the corporate formalities have been completed.State law and bylaw provisions as to the time of effectiveness of unanimous consents may be helpful in evaluating these issues. It is important to note that most of these practices are not inherently illegal.SEC investigations, lawsuits, terminations, and even criminal prosecutions followed in the great stock option backdating scandal.(All this occurred before the current deadline for filing Form 4s, which made backdating possible.) The number of executives and board members who seemed to think that backdating was okay was truly astounding.Most employee stock options are, or purport to be, granted “at-the-money,” meaning that the exercise price of the option equals the market price of the underlying stock on the date of the grant.