John Carney of the Dealbreaker.com site has several posts on Tuesday criticizing the Wall Street Journal’s most-recent backdating of stock options story, which appeared in Friday’s Journal.
First, Carney wrote, “Backdating does not necessarily ‘violate the rational of stock options.’ This is a point we made a long, long time ago. First of all, even the reporters statement of ‘the rationale’ is questionable. There are many rationales for granting stock options. In addition to tying employee compensation to stock performance, stock options also allow a company to provide compensation to valuable employees without diminishing their immediate cash position. What’s more, some employees prefer stock options to immediate cash payments because they want to participate in the potential upside growth of their companies. There are also powerful tax-incentives for accepting stock-options, since they are usually not taxed until a gain is realized.
“More importantly, none of these rationales (save, perhaps, for the tax-deferment) is violated by granting backdated stock options. This should even be obvious for the rationale preferred by the Journal reporters. Holders of backdated stock options may have a ‘head start’ on their optionsâ€”the options are actually in the money when grantedâ€”but they still must usually hold the options for years before they can be cashed in, and their profits still increase with the rise of the share price. Their incentives are thus aligned exactly with those of other shareholders.”
If that weren’t enough, Carney later added in another post: “The reporters also seem to misunderstand the process of how stock options are awarded.
“The reporters note that the chief financial officer of Broadcom urged that the options awards to executives be dated on December 24th. They then add:
They were, and that was fortunate for recipients. Broadcom’s share price rose 23% between the two dates. The pretense that the options had been granted on the earlier date made them extra valuable.
“That sure is snide and sound clever. But it rests on a very fundamental misunderstanding of how options are awarded. It’s not very likely the executives of Broadcom was destined to get a set amount of options, and so pricing them on an earlier date inflated their pay. It’s far more likely that the executives at Broadcom were going to receive total compensation packages worth a certain amount, and that dating the option grants earlier just allowed the company to issue fewer options.”