Definition of stock option backdating. Publications.



Definition of stock option backdating

Definition of stock option backdating

About 40 percent of the top 0. Types of compensation[ edit ] See also: Employee compensation in the United States , Employee stock option , Golden parachute , and Performance-related pay The occupation of "executive" a person having administrative or managerial authority in an organization [35] includes company presidents, chief executive officers CEOs , chief financial officers CFOs , vice presidents, occasionally directors, and other upper-level managers. But components of executive pay are more numerous and more complex than lower-level employees.

Other types are not, but generally make up a higher e. One source sums up the components of executive pay as Base salary Incentive pay, with a short-term focus, usually in the form of a bonus Incentive pay, with a long-term focus, usually in some combination of stock awards, option awards, non-equity incentive plan compensation Enhanced benefits package that usually includes a Supplemental Executive Retirement Plan SERP Extra benefits and perquisites, such as cars and club memberships Deferred compensation earnings [37] Salary plus short-term bonuses are often called short-term incentives, and stock options and restricted shares long-term incentives.

Bonuses[ edit ] In , According to one anonymous insider, "When you've got a formula, you've got to have goals—and it's the people who are the recipients of the money who are setting these. It's in their interests to keep the goals low so that they will succeed in meeting them. For example, when executives failed to meet the annual earnings growth rate target of 15 percent at Coca-Cola in , the target was dropped to 11 percent.

He was given a half million dollar bonus nonetheless on the grounds of his "tremendous" efforts toward improving worker safety. To entice the potential hire the new employer had to compensate them for their loss by paying a massive signing bonus [64] Starting around the mids in the US, the hellos are said to have become "larger and more common".

Individual equity compensation may include: In , nearly two-thirds of total CEO compensation was delivered in the form of stock or options. In the late s, investor Warren Buffett lamented that "there is no question in my mind that mediocre CEOs are getting incredibly overpaid.

And the way it's being done is through stock options. Use of options has not guaranteed superior management performance. An estimated 95 percent of corporations in America pay executives with " at-the-money " options—i. Repricing the options to a lower strike price by backdating the option to a date when stock prices were lower Repricing of stock options has been found to be associated with the option-granting firm's poor stock price performance rather than industry-wide shocks [87] [88] [89] , Timing the granting of options to events that will raise or lower stock prices, Not adjusting for windfall gains for the firm unrelated to management's own efforts falling interest rates, market and sector-wide share price movements, etc.

Studies of the timing of option grants to executives have found "a systematic connection" between when the option were granted and corporate disclosures to the public. Repricing of stock options also frequently occurs after the release of bad news or just prior to the release of good news. Since executives have access to insider information on the best time to sell, this may seem in violation of SEC regulations on insider trading. It is not, however, if the insider knowledge used to time a sale is made up of many pieces and not just a single piece of "material" inside data.

But even if there is material knowledge, the SEC enforcement is limited to those cases easily won [] by its relatively small budget. Restricted stock that is forfeited if the executive leaves before the vesting period is up is sometimes used by companies as a "retention tool" to encourage executives to stay with the company.

The packages include features such as retirement plans and deferred compensation, as well as post-retirement perks and guaranteed consulting fees. Prior to a SEC overhaul of proxy disclosures of executive compensation, [] [] the packages were unique to executives because unlike salary, bonuses, and stock options, they had the advantage of not being required to be disclosed to the public in annual filings, indicating the dollar value of compensation of the CEO and the four other most highly paid executives.

The SEC required only the compensation of current employees be reported to shareholders, not the perks and cash provided to anyone no longer working for the firm. As of , some 70 percent of firms surveyed provided non-qualifying SERPs to their executives, and 90 percent offer deferred compensation programs. An example of how pensions have been used as "stealthy" compensation mentioned above was a change in the formula for determining the pension that one retiring CEO Terrence Murray of FleetBoston Financial made shortly before his departure.

While his original contract based his pension on his average annual salary and bonus over the five years before retirement, that was changed to his average taxable compensation over the three years he received the most compensation.

The numbers were revealed only because a newspaper covering the story hired an actuary to calculate the new basis. They differ from many lower-level packages not only in their size, but in their broad guarantee to be paid even in the face of poor performance. The typical CEO is not anticipating many years of income stream since the usual executive contract is only three years.

And if employers are worried about coaxing risk-adverse potential employees, why are executives the only ones provided with this treatment? They may "include forgiveness of loans, accelerated vesting of options and restricted stock, increases in pension benefits for example by 'crediting' CEOs with additional years of service , awards of lump-sum cash payments, and promises" of the previously mentioned consulting contracts.

These have included use of corporate jets sometimes for family and guests as well , chauffeured cars, personal assistants, financial planning, home-security systems, club memberships, sports tickets, office space, secretarial help, and cell phone service. Perks lack the flexibility of cash for the beneficiary. Consider retiree use of corporate jets, now a common perk. Although the marginal cost of allowing a retired executive to use the company jet may appear limited, it can run quite high.

Consider the use of a company plane for a flight from New York to California and then back several days later. Because the New York-based aircraft and flight crew will return to the East Coast after dropping the retired exec off, the actual charge to the company is two round trips: Consulting contracts[ edit ] As of , about one quarter of CEOs negotiated a post-retirement consulting relationship with their old firm [] [] despite the fact that few CEOs have been known to seek advice from their predecessors.

Most equity compensation, such as stock options, does not impose a direct cost on the corporation dispensing it. It does, however, cost company stockholders by increasing the number of shares outstanding and thus, diluting the value of their shares. To minimize this effect, corporations often buy back shares of stock which does cost the firm cash income.

The concept has "unmatched tax benefits" such as "tax-deferred growth of the inside buildup of the policy's cash value, tax-free withdrawals and loans, and income tax-free death benefits to beneficiaries," [] but has been criticized by some of the families of the insured deceased who maintain that "employers shouldn't profit from the deaths" of their "loved ones.

Donaldson , called executive compensation "and how it is determined One of the great, as-yet-unsolved problems in the country today. Bogle, Academy of Management, May , p. One calculation by one executive compensation consultant Michael Dennis Graham found "an extremely high correlation" between CEO pay and stock market prices between and , [] while a more recent study by the liberal Economic Policy Institute found nominal CEO compensation growth percent "substantially greater than stock market growth" from to As business "became glamorized in the s, CEOs realized that being famous was more fun than being invisible".

Appearing "near the top of published CEO pay rankings" became a "badge of honor" rather than an embarrassment for many CEOs. A sharp decline in the top marginal income tax rate—from 70 percent in the early s to 35 percent today—allows executives to keep much more of their pay and thus incentivizes the top executive "to take advantage of his position. News organizations that might once have condemned lavishly paid executives applauded their business genius instead; politicians who might once have led populist denunciations of corporate pay now need high-income donors such as executives for campaign contributions; unions that might once have walked out to protest giant executive bonuses have been devastated by corporate anti-union campaigns and have lost most of their political influence.

Investor Warren Buffett has disparaged the proverbial "ever-accommodating firm of Ratchet, Ratchet and Bingo" for raising the pay of the "mediocre-or-worse CEO". In the words of journalist Clive Crook , the consultants "are giving advice on how much to pay the CEO at the same time that he or she is deciding how much other business to send their way.

At the moment [], companies do not have to disclose these relationships. Shareholders had been told the compensation was devised with the help of an "outside consultant" the company Verizon declined to name. Better, in the event that something goes wrong, to be able to tell yourself that you spent all you could.

Company owners—shareholders—and the directors elected by them could prevent this. Why was negotiation of the CEO pay package "like having labor negotiations where one side doesn't care Large shareholders in a company have both the means and the motive to remind managers whom they are working for and to insist that costs including managers' pay be contained and assets not squandered on reckless new ventures or vanity projects.

Shareholders with small diversified holdings are unable to exercise such influence; they can only vote with their feet, choosing either to hold or to sell their shares, according to whether they think that managers are doing a good job overall. Shareholdings have become more dispersed in recent decades, and the balance of power has thereby shifted from owners to managers.

Bogle worries that money managers have become much less interested in the long term performance of firms they own stock in, with the average turnover of a share of stock "exceeding percent changed hands two and a half times " in , compared to 78 percent in and "21 percent barely 30 years ago. Following earlier scandals over management accounting fraud and self-dealing, [] NASDAQ and NYSE stock exchange regulations require that the majority of directors of boards, and all of the directors of the board committees in charge of working out the details of executive pay packages compensation committees and nominating new directors nomination committees , [] be "independent".

Fried, and David I. Regulations limit director compensation but not that of immediate family members of the directors who are non-executive employees of the firm. Election and re-election to the board in large companies is assured by being included on the proxy slate, which is controlled by the nomination committee.

Dissident slates of candidate have very seldom appeared on shareholder ballots. It "has been common practice" for companies to direct some of this to the "nonprofit organizations that employ or are headed by a director. CEOs are often involved in bringing a director onto the board. Being a director has been compared to being in a club.

What "places constraints on executive compensation" is not the marketplace for executive talent and hard-headed calculation of compensation costs and benefits by directors and the experts they may use, or shareholder resolutions, proxies contests, lawsuits, or "the disciplining force of markets".

The controlling factor is what the authors call "outrage"—"the criticism of outsiders whose views matter most to [executives] — institutional investors, business media, and the social and professional groups to which directors and managers belong" [] and the executives' fear that going too far will "create a backlash from usually quiescent shareholders, workers, politicians, or the general public.

Larger boards—where it's harder to get a majority to challenge the CEO, and where each director is less responsible—are correlated with CEO pay that's higher [] and less sensitive to performance.

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Definition of stock option backdating

About 40 percent of the top 0. Types of compensation[ edit ] See also: Employee compensation in the United States , Employee stock option , Golden parachute , and Performance-related pay The occupation of "executive" a person having administrative or managerial authority in an organization [35] includes company presidents, chief executive officers CEOs , chief financial officers CFOs , vice presidents, occasionally directors, and other upper-level managers.

But components of executive pay are more numerous and more complex than lower-level employees. Other types are not, but generally make up a higher e. One source sums up the components of executive pay as Base salary Incentive pay, with a short-term focus, usually in the form of a bonus Incentive pay, with a long-term focus, usually in some combination of stock awards, option awards, non-equity incentive plan compensation Enhanced benefits package that usually includes a Supplemental Executive Retirement Plan SERP Extra benefits and perquisites, such as cars and club memberships Deferred compensation earnings [37] Salary plus short-term bonuses are often called short-term incentives, and stock options and restricted shares long-term incentives.

Bonuses[ edit ] In , According to one anonymous insider, "When you've got a formula, you've got to have goals—and it's the people who are the recipients of the money who are setting these.

It's in their interests to keep the goals low so that they will succeed in meeting them. For example, when executives failed to meet the annual earnings growth rate target of 15 percent at Coca-Cola in , the target was dropped to 11 percent.

He was given a half million dollar bonus nonetheless on the grounds of his "tremendous" efforts toward improving worker safety. To entice the potential hire the new employer had to compensate them for their loss by paying a massive signing bonus [64] Starting around the mids in the US, the hellos are said to have become "larger and more common". Individual equity compensation may include: In , nearly two-thirds of total CEO compensation was delivered in the form of stock or options.

In the late s, investor Warren Buffett lamented that "there is no question in my mind that mediocre CEOs are getting incredibly overpaid. And the way it's being done is through stock options. Use of options has not guaranteed superior management performance. An estimated 95 percent of corporations in America pay executives with " at-the-money " options—i.

Repricing the options to a lower strike price by backdating the option to a date when stock prices were lower Repricing of stock options has been found to be associated with the option-granting firm's poor stock price performance rather than industry-wide shocks [87] [88] [89] , Timing the granting of options to events that will raise or lower stock prices, Not adjusting for windfall gains for the firm unrelated to management's own efforts falling interest rates, market and sector-wide share price movements, etc.

Studies of the timing of option grants to executives have found "a systematic connection" between when the option were granted and corporate disclosures to the public.

Repricing of stock options also frequently occurs after the release of bad news or just prior to the release of good news. Since executives have access to insider information on the best time to sell, this may seem in violation of SEC regulations on insider trading. It is not, however, if the insider knowledge used to time a sale is made up of many pieces and not just a single piece of "material" inside data. But even if there is material knowledge, the SEC enforcement is limited to those cases easily won [] by its relatively small budget.

Restricted stock that is forfeited if the executive leaves before the vesting period is up is sometimes used by companies as a "retention tool" to encourage executives to stay with the company.

The packages include features such as retirement plans and deferred compensation, as well as post-retirement perks and guaranteed consulting fees. Prior to a SEC overhaul of proxy disclosures of executive compensation, [] [] the packages were unique to executives because unlike salary, bonuses, and stock options, they had the advantage of not being required to be disclosed to the public in annual filings, indicating the dollar value of compensation of the CEO and the four other most highly paid executives.

The SEC required only the compensation of current employees be reported to shareholders, not the perks and cash provided to anyone no longer working for the firm. As of , some 70 percent of firms surveyed provided non-qualifying SERPs to their executives, and 90 percent offer deferred compensation programs. An example of how pensions have been used as "stealthy" compensation mentioned above was a change in the formula for determining the pension that one retiring CEO Terrence Murray of FleetBoston Financial made shortly before his departure.

While his original contract based his pension on his average annual salary and bonus over the five years before retirement, that was changed to his average taxable compensation over the three years he received the most compensation. The numbers were revealed only because a newspaper covering the story hired an actuary to calculate the new basis. They differ from many lower-level packages not only in their size, but in their broad guarantee to be paid even in the face of poor performance.

The typical CEO is not anticipating many years of income stream since the usual executive contract is only three years. And if employers are worried about coaxing risk-adverse potential employees, why are executives the only ones provided with this treatment?

They may "include forgiveness of loans, accelerated vesting of options and restricted stock, increases in pension benefits for example by 'crediting' CEOs with additional years of service , awards of lump-sum cash payments, and promises" of the previously mentioned consulting contracts.

These have included use of corporate jets sometimes for family and guests as well , chauffeured cars, personal assistants, financial planning, home-security systems, club memberships, sports tickets, office space, secretarial help, and cell phone service. Perks lack the flexibility of cash for the beneficiary. Consider retiree use of corporate jets, now a common perk. Although the marginal cost of allowing a retired executive to use the company jet may appear limited, it can run quite high. Consider the use of a company plane for a flight from New York to California and then back several days later.

Because the New York-based aircraft and flight crew will return to the East Coast after dropping the retired exec off, the actual charge to the company is two round trips: Consulting contracts[ edit ] As of , about one quarter of CEOs negotiated a post-retirement consulting relationship with their old firm [] [] despite the fact that few CEOs have been known to seek advice from their predecessors. Most equity compensation, such as stock options, does not impose a direct cost on the corporation dispensing it.

It does, however, cost company stockholders by increasing the number of shares outstanding and thus, diluting the value of their shares. To minimize this effect, corporations often buy back shares of stock which does cost the firm cash income. The concept has "unmatched tax benefits" such as "tax-deferred growth of the inside buildup of the policy's cash value, tax-free withdrawals and loans, and income tax-free death benefits to beneficiaries," [] but has been criticized by some of the families of the insured deceased who maintain that "employers shouldn't profit from the deaths" of their "loved ones.

Donaldson , called executive compensation "and how it is determined One of the great, as-yet-unsolved problems in the country today. Bogle, Academy of Management, May , p. One calculation by one executive compensation consultant Michael Dennis Graham found "an extremely high correlation" between CEO pay and stock market prices between and , [] while a more recent study by the liberal Economic Policy Institute found nominal CEO compensation growth percent "substantially greater than stock market growth" from to As business "became glamorized in the s, CEOs realized that being famous was more fun than being invisible".

Appearing "near the top of published CEO pay rankings" became a "badge of honor" rather than an embarrassment for many CEOs. A sharp decline in the top marginal income tax rate—from 70 percent in the early s to 35 percent today—allows executives to keep much more of their pay and thus incentivizes the top executive "to take advantage of his position.

News organizations that might once have condemned lavishly paid executives applauded their business genius instead; politicians who might once have led populist denunciations of corporate pay now need high-income donors such as executives for campaign contributions; unions that might once have walked out to protest giant executive bonuses have been devastated by corporate anti-union campaigns and have lost most of their political influence.

Investor Warren Buffett has disparaged the proverbial "ever-accommodating firm of Ratchet, Ratchet and Bingo" for raising the pay of the "mediocre-or-worse CEO". In the words of journalist Clive Crook , the consultants "are giving advice on how much to pay the CEO at the same time that he or she is deciding how much other business to send their way.

At the moment [], companies do not have to disclose these relationships. Shareholders had been told the compensation was devised with the help of an "outside consultant" the company Verizon declined to name.

Better, in the event that something goes wrong, to be able to tell yourself that you spent all you could. Company owners—shareholders—and the directors elected by them could prevent this. Why was negotiation of the CEO pay package "like having labor negotiations where one side doesn't care Large shareholders in a company have both the means and the motive to remind managers whom they are working for and to insist that costs including managers' pay be contained and assets not squandered on reckless new ventures or vanity projects.

Shareholders with small diversified holdings are unable to exercise such influence; they can only vote with their feet, choosing either to hold or to sell their shares, according to whether they think that managers are doing a good job overall. Shareholdings have become more dispersed in recent decades, and the balance of power has thereby shifted from owners to managers.

Bogle worries that money managers have become much less interested in the long term performance of firms they own stock in, with the average turnover of a share of stock "exceeding percent changed hands two and a half times " in , compared to 78 percent in and "21 percent barely 30 years ago. Following earlier scandals over management accounting fraud and self-dealing, [] NASDAQ and NYSE stock exchange regulations require that the majority of directors of boards, and all of the directors of the board committees in charge of working out the details of executive pay packages compensation committees and nominating new directors nomination committees , [] be "independent".

Fried, and David I. Regulations limit director compensation but not that of immediate family members of the directors who are non-executive employees of the firm. Election and re-election to the board in large companies is assured by being included on the proxy slate, which is controlled by the nomination committee. Dissident slates of candidate have very seldom appeared on shareholder ballots.

It "has been common practice" for companies to direct some of this to the "nonprofit organizations that employ or are headed by a director.

CEOs are often involved in bringing a director onto the board. Being a director has been compared to being in a club. What "places constraints on executive compensation" is not the marketplace for executive talent and hard-headed calculation of compensation costs and benefits by directors and the experts they may use, or shareholder resolutions, proxies contests, lawsuits, or "the disciplining force of markets". The controlling factor is what the authors call "outrage"—"the criticism of outsiders whose views matter most to [executives] — institutional investors, business media, and the social and professional groups to which directors and managers belong" [] and the executives' fear that going too far will "create a backlash from usually quiescent shareholders, workers, politicians, or the general public.

Larger boards—where it's harder to get a majority to challenge the CEO, and where each director is less responsible—are correlated with CEO pay that's higher [] and less sensitive to performance.

Definition of stock option backdating

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2 Comments

  1. They may "include forgiveness of loans, accelerated vesting of options and restricted stock, increases in pension benefits for example by 'crediting' CEOs with additional years of service , awards of lump-sum cash payments, and promises" of the previously mentioned consulting contracts.

  2. Studies of the timing of option grants to executives have found "a systematic connection" between when the option were granted and corporate disclosures to the public.

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