The ethics of repricing and backdating employee stock options
They are given to executives as a form of noncash compensation.
The option or “strike price” is normally equal to the market price of the stock on the day that the option is granted to the employee.
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There are three main forms of compensation that most corporations pay to their employees.
Backdating stock options benefits the executive at the expense of the other shareholders.
It is not in the best interest of the majority of the shareholders of the company.
Such stock options are referred to as “underwater” or “out of the money.” In such cases, companies will sometimes reprice the stock options to a price that is less than the current market price, or cancel the underwater options and issue new options that are priced at the new current market price.
Both repricing and backdating of stock options have effectively been curtailed as a result of Sarbanes-Oxley disclosure requirements. One is to “spring-load” the options by issuing them to employees just before good news is announced to investors.
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The compensation for the employees has been used as a means of altering the financial information given to the investors and thus, the investors tend to receive wrong financial information or rather a fraudulent misrepresentation.