First service backdating stock options
Backdating is not per se illegal, but, under the Sarbanes-Oxley Act, top executives must report grants made to them within two days of the grant (before Sarbanes-Oxley, it was 45 days).For its part, the company must report failure to comply on its annual proxy statement.
Chances are this particular practice will now go away, but another one will surface all too soon.Excessive executive compensation seems to be an issue that just won't go away because excessive executive compensation won't go away.The theory seems to be that a good CEO is worth any price a company will pay, no matter that the compensation might literally exceed the GNP of some countries or be enough to hire hundreds of talented employees.Any gain a company makes is assumed to be the sole result of the extraordinary wisdom of this one very special person, not the collective efforts of hundreds or thousands of employees.It's demonstrably bunk, but then the people setting executive pay operate in a parallel universe.(The administrative problem could be resolved if more companies would hire people with the right skills for stock plan administration, such as those with certification from the Certified Equity Professional Institute at Santa Clara University.) There are also companies, such as Microsoft, that issued options broadly but were concerned that because of the volatility of their stock, an employee who joined the company on one day might get an option grant at a price very different from one who joined a few days earlier or later.
So Microsoft, on the advice of its auditors, issued the option at the lowest price over a 30-day period.
The legal theory involved here could open the door for other interventions in potentially abusive executive compensation issues.
Soon thereafter, two public pension funds in Ohio indicated they will be suing United as well, followed by a retirement fund for Pirelli Armstrong Tire.
No matter how much particular practices may be decried, the consensus seems to remain that corporate success is attributable to a very few people at the top, with everyone else pretty much being replaceable parts.
Law360 (June 15, 2006, AM EDT) -- It is virtually impossible to pick up a newspaper these days and not see an article about the ever-growing list of companies being caught up in investigations concerning allegations of backdated stock options.
As important as the issue of executive equity compensation is, it should not blind us to a more important concern.