Errors and Omissions

WSJ Op-Ed columnist misses the mark on options backdating rationalization

Have you read all those stories about the suspicious practice of options backdating (here's one of my posts on the subject)? The Wall Street Journal's op-ed columnist Holman Jenkins (here's the article) has a simple explanation for us. It turns out that it's an "innocuous and even sensible" practice!

Who knew?

Jenkins spins out numerous hypotheses for why backdating of options has occurred. It can "simplify the negotiation" of an options package by holding the price constant while the number of options is discussed. It helps CEOs avoid "gaming" the stock price by timing the grant just before good news is announced. (More realistically, Mr. Jenkins says that it "eliminates a source of ill will" with the executive. You got that right.)

Oh, and it's perfectly understandable that companies would need rigged compensation packages during the late '90's, when the bubble "created unusual challenges for tech companies trying to recruit and keep talent."

And he credits higher pay for CEOs to a dynamic market for talent, not "board cronyism." (See this post on Home Depot CEO Bob Nardelli for a different view on that topic.)

Options are supposed to be performance-based. If the price is set artificially low, options generate potential returns immediately, at minimum diluting the connection between pay and performance.

Jenkins is right about one thing, at least. The illegality of this practice is not yet clear. But only the most naive or cynical observer would look at options backdating as an innocuous practice.

Boards, if you want to give CEOs cash, increase their bonus or salary. And tell the shareholders about it.

Mr. Jenkins, if you intended to give the other side of the story with respect to options backdating, please try again.

newspapers, media, Wall Street Journal, CEO compensation

posted by Unknown @ 6/21/2006 10:16:00 AM