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

Abstract

Purpose

Many 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/approach

The 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.

Findings

The 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 implications

The 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/value

This paper presents a contemporaneous discussion and data on legal and regulatory changes that resulted from management malfeasance of executive compensation.

Citation

Oppenheimer, P.H. (2011), "Legal and accounting issues of manipulating the timing of stock option grants", Journal of Financial Crime, Vol. 18 No. 1, pp. 63-75. https://doi.org/10.1108/13590791111098807