409a backdating

Even if the executives were uninvolved in the wrongdoing, they were present when the errors occurred.

As between the executives and investors, who ought to absorb the compensaion consequences involved with cleaning up the mess?

article entitled “Executives Get Bonuses As Firms Reprice Options” (here, subscription required), some of the companies ensnared in the options backdating scandal are paying cash bonuses to executives whose options are being repriced, as the option exercise price is shifted to the actual grant date from the backdated date.

According to the article, these bonuses are going to executives who weren’t involved in options wrongdoing, and who would otherwise see the overall value of their paid compensation shrink as a result of the repricing.

Shareholders already are absorbing all of the costs of accountants’ and attorneys’ services required to clear up accounts.

409a backdating-20409a backdating-57

Although these practices involve different types of conduct, both create problems because the date when the exercise price is set is not the same as the date on which the option is awarded.

There are also a couple of very serious atmospheric problems with the cash payments at this particular point in time.

First, by communicating that the incremental additional value of the backdating options represents compensation to which the executives were entitled, the companies are inferentially suggesting that the backdating was an intended part of their compensation scheme.

By converting that investment risk into fixed cash, the element of shared interest is eliminated.

To the contrary, it converts the shared interest into exclusive service of executives’ interests at shareholders’ expense.

Leave a Reply