It was the pseudo-scandal launched by the Wall Street Journal's investigative unit, after its reporters began following up on an academic report that demonstrated many executive stock options awards were too well-timed to be plausible.The basic idea was that many companies seemed to award stock options on days when their stocks were at low-points, which increased the value of the options when the stock increased and made the stock cheaper to buy for the executives. All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.Another consequence is that the company underrepresents the real nature of an executive’s compensation, perpetuating the myth that options are performance-based incentive compensation.Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term. As a consequence, the option is immediately profitable, or “in the money,” to the option holder.In researching this post, I came across a number of recent reports on Henry Nicholas III, the once high-flying CEO and cofounder of Broadcom. While the story was enthralling, I didn't understand what any of it had to do with a federal investigation into stock option backdating.The allegations of illicit sex, drugs, and rock and roll reminded me of the 60s ... Sure, Broadcom had to take a .2 billion charge to fix the accounting mess left by the company's former executives.
That means the company incurs an expense equal to the difference in the share price between the two dates.
But how does that relate to hiring prostitutes and drugging customers without their knowledge?
Said another way, do the feds really need to dig that deep to find enough rope to hang executives with?
No one's pay was "inflated" by backdating, unless you assume that the alternative would have been awarding executives exactly the same number of options at less-advantageous prices.
Which, of course, you shouldn't assume since any sensible employee can see that if his each stock option is worth less, he should get more of them.