Option Backdating and its Implications
GOVERNANCE AND EXECUTIVE COMPENSATION, William Forbes, ed., Edward Elgar Publishing, 2010
1 Pages Posted: 10 Apr 2008 Last revised: 24 Jun 2011
Date Written: November 12, 2008
Thousands of US companies appear to have secretly backdated stock options. This paper analyzes three forms of secret option backdating: (1) the backdating of executives' option grants; (2) the backdating of non-executive employees' option grants; and (3) the backdating of executives' option exercises. It shows that each type of backdating less likely reflects arm's-length contracting than a desire to inflate and camouflage executive pay. Secret backdating thus provides further evidence that pay arrangements have been shaped by executives' influence over their boards. The fact that so many firms continued to secretly backdate after the Sarbanes Oxley Act, in blatant violation of its reporting requirements, suggests recent reforms may have failed to adequately curb such managerial power.
Keywords: Executive compensation, stock options, corporate governance, managers, shareholders, CEOs, boards, camouflage, managerial power, Sarbanes Oxley, independent directors
JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14, M41, M49
Suggested Citation: Suggested Citation