An increasingly popular corporate practice that boosts executive compensation by guaranteeing profits on stock-option awards has Federal regulators ready for a crack down, according to this WashingtonPost.com article.
The article goes on to state:
The Securities and Exchange Commission is to issue a statement, possibly as early as next month, clarifying the agency's view of when current law allows backdating of stock options -- picking a date when the stock was at a low point to be the date of the award, thereby immediately guaranteeing a profit. Companies need the permission of directors, consistent with company policy, and full disclosure to investors, including properly counting the added costs against earnings.
This is how it works in a nutshell:
Company officials backdate options to maximize an executive's profit. If a person buys 1 million shares for $25 a share and sells them for $30 a share, that executive will pocket $5 million, before transaction costs and taxes. If the executive backdates the option to a day when the stock was valued at a low point, say $20, then the seller will make $10 million profit by selling the shares at $30.
Read the whole article here.
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