Another scenario involves the allocation of grants to employees from an authorized pool.
If the exercise price is set when the pool is authorized by the board or committee but the allocation and actual grants occur later (when the stock price has increased), backdating issues may arise.
Option grants to new employees have their own set of backdating issues.
A company may want to give a new employee the benefit of any increase in the stock price from the date of acceptance of the employment offer.
SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.
Options granted as of the commencement of employment based on the market price as of the date of acceptance may be problematic if the plan does not permit below-market grants or the grant is not treated as a discounted option for accounting and tax purposes.If the compensation expense is not properly reflected in earnings, the company’s financial statements will be inaccurate and restatement of the financials may be required.The discovery of past backdating practices may raise issues as to the adequacy of the company’s internal controls and disclosure controls and procedures.But if these conditions are not met, a number of negative consequences can result, depending on the individual circumstances of the practice at issue.Options that are granted at less than fair market value result in higher levels of compensation expense.Officers and directors could face criminal liability if they have intentionally falsified documents. Companies need to understand their historical option granting practices, address any potential problems and review their option granting procedures going forward.