Legal and accounting issues of manipulating the timing of stock option grants

Abstract

PurposeMany corporate managers, with the aid of the board of directors, discovered that they could provide themselves with guaranteed or excessive compensation by manipulating the terms of stock option grants that were included in their compensation packages. This paper seeks to examine the legal, tax, and accounting issues that have evolved because of these suspect illegal activities.Design/methodology/approachThe author presents the theory behind performance‐based compensation that is the basis for employee stock option grants. The author then examines regulations, judicial theory, and court cases to determine the current legal status of backdating, spring loading, or bullet dodging of executive stock option grants.FindingsThe current legal environment has made it difficult for executives to continue the practice of manipulating stock option grants without falling under the ire of regulators and shareholders. However, a question remains whether executives that manipulated stock option grants in the past will be found criminally liable for their acts.Practical implicationsThe paper's review of the discourse on the legality of corporate executives enhancing their compensation packages shows the complexity of detecting and regulating this type of suspect activity.Originality/valueThis paper presents a contemporaneous discussion and data on legal and regulatory changes that resulted from management malfeasance of executive compensation.