Backdating Stock Option Grants - Are You Surprised?

The Wall Street Journal has released results of an investigation of the timing of stock option grant dates and resulting gains. The study found that six companies had granted options on days that were peculiarly advantageous - and the odds of that timing being serendipitous were around 300 billion-to-1. One of the six CEOs resigned immediately.

I was not shocked at this revelation because I know several companies that have done this and weren't among the six the Journal "outed" in their study. But the Journal's methodology - while conducted, reviewed and blessed by academics - still reflects some naiveté about how easy it is to game the system.

If the Journal had asked me how to go about looking for such manipulation, I would have told them to look for odd variations in the timing of grants, regardless of share price. The academics were chasing their tail with the methodology they used. Had they used my approach, which I will not fully disclose here, they would have found dozens of companies that had coincidentally granted options at opportune times. I don't have a Ph.D. after my name and my opinion may not count, but I can tell you that my methodology turns up a lot more than six companies. These types of abuses are widespread, difficult to identify, almost impossible to regulate, and at the core of the deterioration of integrity in American business practices.

My model of compensation integrity, developed for The Integrity Institute, looks at a number of metrics that identify compensation practices that undermine the sustainability of businesses. Stay tuned over the next couple of months as the executive compensation disclosure season gives us thousands of data points to scrutinize. Don't be distracted by the "big numbers" approach that journalists like. It's not how many points you score, it's whether you played by the rules to score them.