Introduction
On the heels of Enron, Worldcom, and Tyco, the financial community has been introduced to the latest corporate imbroglio known as backdating. With backdating, some executives allegedly manipulated their stock options in an attempt to increase their own compensation. While the SEC and Justice Department have indicated that they plan to vigorously investigate allegations of backdating, the reasons for backdating vary from the benign to the fraudulent.
This article explains what backdating is as well as provides information on economic impacts, if any, on companies whose options were backdated.
Employee Options
Companies often incentivize employees by granting them "options" or "call options." A call option gives the employee the right, but not the obligation, to purchase the company’s stock at a given price in the future. As the stock price increases, past a certain point, the payoff of the option increases as well.
