Companies backdating options

Four years ago, in 2002, the Sarbanes-Oxley Act very presciently tightened up on the reporting of stock option grants.Before Sarbanes-Oxley, officers and directors didn't have to disclose their receipt of stock option grants until after the end of the fiscal year in which the transaction took place.Very recently, we enacted new rules that will require, beginning with the next proxy season, the full disclosure of all aspects of executive and director pay and benefits.

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Under the new SEC rules, all of an executive's compensation will now be totaled into one number, so that it can be compared easily from person to person, company to company, and industry to industry.

The new rules also require detailed disclosure of compensation in the form of stock options, which will show whether a company has backdated options, and if so, why.

And for growth companies, the use of stock options as compensation offers a way to conserve resources while attracting top-flight talent in highly competitive markets.

All of these factors have contributed to the now-widespread use of stock options as compensation.

But just as option compensation increased, so did the potential for abuse.

And Congress deserves credit for taking preemptive action that we now know was critical to stopping the spread of the backdating contagion.

So a grant in January might not have to be disclosed until more than a year later.

SOX changed that, by requiring real-time disclosure of option grants.

With complete hindsight, we can now all agree that this purpose was not achieved.

Indeed, this tax law change deserves pride of place in the Museum of Unintended Consequences.

And of course there were other reasons, many of them good ones with solid economic rationales, that companies wanted to use options as a form of compensation.

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