Backdating options definition

27 Nov

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.Do you ever wish that you could turn back the hands of time?For example, suppose that it is August 16, 2006, and the closing share price of XYZ Corp. On June 1, 2006, XYZ Corp.'s stock price was at a six-month low of .Technically, any options granted today should bear a strike price of .According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.

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For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only per share.

Awarding employees with stock options those are dated prior to the actual grant date.

The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.

It is suspected that these situations are not a coincidence and that the board or executives were granted options based on a past date in order to make these options more profitable.

At first glance, call options represent the perfect way to tie an executive's level of compensation to the company's performance because as the company's share price increases, so does the payoff the executive will receive.