ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Executive Stock options – Corporate’s Shady Secrets

Updated on June 18, 2012

Over the last few years there have been some news coverage dealing with executive compensation with stock options. This type of compensation occurs when an executive is granted the "option" to purchase the company's stock at a certain price sometime in the future.

The theory is, if the executive is effective, his management skills will lead to a higher stock price. As a reward the executive can purchase the stock at the earlier, lower price and lock in an automatic gain in his shares. The problem lies with certain companies who have been falsifying important information dealing with such transactions.

It appears that the recent stories about executive stock options exist because there are so many ways it can go wrong. It is meant to motivate good executives to do better. However, use of stock options as compensation has led to the rash of communal fraud and abuse. Greedy executives hope to own large amounts of options and it causes many of them to take drastic steps. A good majority go as far as falsifying records. They do this to drive the stock price up so they could benefit by cashing in while the stock was artificially high.

The fear of executives taking advantage should sway corporations, but it seems that the government provides an additional benefit to keep it going. Providing the stock option gives a corporation the opportunity to take a tax deduction. The greedy executives can also take advantage of this and use loopholes in accounting rules to avoid counting them in financial statements when they are issued. This creates very misleading financial reports and additional savings for a corporation.

Companies that include stock options for high-paid employees seem to find more negative backlash in the news than they do benefits. It appears that executives will drive up stock value by altering the created date to match the date of the stock's lowest price. This allows an employee to benefit illicitly when exercising the purchase option.

Surprisingly, the practice of changing dates is not illegal, but defrauding the government is. Misrepresenting the options in official reports to shareholders, and the S.E.C (Securities and Exchange Commission) by understating the company's expenses and overstating its net income is a crime referred to as backpedaling. At least 50 companies have been investigated by the S.E.C for backpedaling on the dates of stock options. When there are falsified documents, the government views that as intent to defraud. It is a general rule that people do not normally falsify documents unless they are trying to hide something or portray something different from reality.

There is record of fraudulent activity all over. Even the major corporation Apple was recently put under a microscope when a recent sink in shares to as much as 6 percent due to misrepresented numbers. Though, they later recovered and were off only about 0.5 percent in afternoon trading.

One of the first CEOs to be prosecuted for the fraudulent accounting activities was Gregory Reyes, the former chief executive officer of Brocade Communications Systems in San Jose. The former Silicon Valley executive received a sentence of a year and nine months in prison and a $15 million fine. He was named in Time magazine 2007 “Top 10 crooked CEO’s”, (pictured below)


Source

The ethical ramifications of corporate fraud are great and many, causing a great many victims. If it is done enough, it can negatively affect the overall economy, employment, and, as seen with the much publicized Enron scandal, people's life savings. In an economy like ours trust is already eliminated and it is harder for the average Joe to spend money at a place he distrusts, which causes everyone to suffer.

Recently there have been some studies made into this type of fraud to prevent and understand it. A University of Iowa researcher, Erik Lie decided to study the difference of stocks prices before and after options grants. Lie did a massive study and recorded the transaction averages of thousands of option grants between two decades. In his report, Lie discovered that executives had to be backdating the stocks unless they were uniquely gifted to forecast precise market movements (he adds that the possibility of that happening are as likely as winning the lottery twice). In response to this problem, the SEC has established rules that make executives disclose their pay.

During this time of great scandals and fraudulent business activity a new accounting law came into effect. The Sarbanes-Oxley act requires that option grants be reported within two business days. This new law will also explain the new trend of “super packs” that have been taken up by people to hide their money. I personally feel that is we are going to work ourselves out of this economic depression we have to work together. I do not claim to have an answer for an easy fix because I do not believe there is one. I do, however, believe that the stock market should probably not be given as an executive option because the stock market is already a mess as it is.


References

J. Fox, (November 14 2006) Sleazy CEOs have even more options tricks. CNN Money:

http://money.cnn.com/2006/11/13/magazines/fortune/options_scandals.fortune/index.htm?postversion=2006111416

J. Grant (May 31 2006) Stock options under scrutiny. FT.COM http://www.ft.com/cms/s/2/88217da0-f0f2-11da-9338-0000779e2340.html#axzz1HIAiNu00

CNN Editors (December 27 2006) Apple sinks, then recovers after report. CNN Money. http://money.cnn.com/2006/12/27/technology/apple_options/index.htm

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      Gabby 

      3 years ago

      That's really thinking at an imirvsspee level

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)