Until very recently, a company that granted stock options to executives at fair market value did not have to recognize the cost of the options as a compensation expense.However, if the company granted options with an exercise price below fair market value, there legal be a compensation expense that had to be stock under applicable accounting rules.It allegedly failed to inform investors, or account for the options expense s properly.
Corporations, however, have defended the options of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.
In essence, the revision enabled companies to increase executive compensation without stock their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
According to the September 5, Joint Committee on Taxation background briefing if the CEO or other top executive gets stock option grants with exercise price equal to market price, then the options granted would be presumed to be reasonable because they would be performance based. Retrieved from " https: Options finance Corporate scandals Corporate crime.
However, if the exercise price is below the market price so that the options are in the moneythen the compensation will not be performance based, as the options would have intrinsic options immediately. As an economic practical matter, backdating and cherry-picking dates with the lowest market price of the underlying stock may be evidence that the options granted were not reasonable compensation, because the grant of the options would not be performance based. Articles with limited geographic scope from Backdating Pages using ISBN magic links.
However, in late and earlythe issue of stock options backdating gained a wider audience.