But it rests on a very fundamental misunderstanding of how options are awarded.
It’s not very likely the executives of Broadcom was destined to get a set amount of options, and so pricing them on an earlier date inflated their pay.
In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.
In essence, the revision enabled companies to increase executive compensation without informing 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.
The reporters note that the chief financial officer of Broadcom urged that the options awards to executives be dated on December 24th.
They then add: That sure is snide and sounds clever.
Backdating does not violate shareholder-approved option plans.It’s far more likely that the executives at Broadcom were going to receive total compensation packages worth a certain amount, and that dating the option grants earlier just allowed the company to issue fewer options.The explicit nature of the chief financial officer’s email makes it very clear that the intent was not to somehow conceal how much the executives were getting paid.Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.Corporations, however, have defended the practice 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.The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.In an earlier piece we discussed the issues surrounding the growing practice of corporations “grossing up” various payments due their executives in an attempt to shield them from further tax consequences.Now Charles Forelle and James Bandler in the Wall Street Journal report on the purported practice of “backdating option grants” for executives so as to maximize their value for the executives who receive them [Ed.: Executive pay at VTSS, MERQE, ADI, CMVT and BRKS were questioned -- see chart from WSJ].Professor notes the academic research on the topic and provides a legal perspective on the practice of backdating: There’s nothing inherently illegal about either paying large compensation or even backdating an option contract, so long as proper corporate procedures were followed and the grant does not amount to a waste of corporate assets.Where public corporations are concerned, however, failure to disclose the backdating likely would constitute securities fraud.