Monday, May 22, 2006

Corporate Cheating with Stock Options

The Wall Street Journal has an outstanding piece today on how some companies might be gaming the timing of granting stock options to executives. Stock options are a form of payment to the executives designed to give them a financial incentive to lead the company to success. In the cases described in the article, the stock options seem to have been timed to match periodic lows in the stock price. The easiest way to do this is by backdating the stock options.

In essence, you grant stock options to the CEO and date them on the date of the lowest price of the stock. Increases in the stock price from there out are all profit. Since you pick the lowest share price, the CEO is bound to make a profit. This completely short-circuits the incentive to do well. If I made you CEO of any company in the world and allowed you to pick the day you get the options and the day you sell them, you could be the biggest bonehead in the world, run the company into the ground and still leave with a huge amount of money.

It’s an outstanding article. Bully for the WSJ for researching and publishing it.

Technorati tags:

No comments: