Given the recent resurgence of news relating to options backdating, I thought I’d reprint the paper for those who might be interested.Executive Summary Stock option backdating is a complex issue.In the coming pages, the history, legal issues, and effects on shareholder value will be explored.
Nonetheless, stock option backdating is a prevalent practice.
The statistics can be staggering: $5.9 billion in fines, more than 120 companies under investigation.
While options are the most prominent form of individual equity compensation, restricted stock, phantom stock, and stock appreciation rights have grown in popularity and are worth considering as well.
Broad-based options remain the norm in high-technology companies and have become more widely used in other industries as well.
The negative effects on shareholder value are significant cause for concern.
Ultimately, the potential gain executives’ reap is far outweighed by the likelihood of detection.
Larger, publicly traded companies such as Starbucks, Southwest Airlines, and Cisco now give stock options to most or all of their employees.
Many non-high tech, closely held companies are joining the ranks as well.
They can also be less appealing in small, closely held companies that do not want to go public or be sold because they may find it difficult to create a market for the shares. Others, however, believe that because option plans allow employees to sell their shares a short period after granting, that options do not create long-term ownership vision and attitudes.
The ultimate impact of any employee ownership plan, including a stock option plan, depends a great deal on the company and its goals for the plan, its commitment to creating an ownership culture, the amount of training and education it puts into explaining the plan, and the goals of individual employees (whether they want cash sooner rather than later).