Apple and stock option backdating

10-Mar-2017 13:37

Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.

This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.

You see, if you backdate stock options to a date when the price of the stock was lower, then the options are "in-the-money" when granted.

That means the company incurs an expense equal to the difference in the share price between the two dates.

Still, given that (a) backdating helps make earnings look better than they are; and (b) Jobs is a huge shareholder of Apple (10.12 million shares, as of last April), how could he not benefit from this behavior? Jobs recommended some backdating dates for other employees.

CEOs at other companies have been forced to resign for such activities. His job may be saved by the fact that he did not directly profit.

The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.

the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.

The academics concluded that something funny was going on.

The companies were awarding the options later but then marking the awards to earlier dates, when the stock's price was low.

CEOs at other companies have been forced to resign for such activities. His job may be saved by the fact that he did not directly profit.The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.The academics concluded that something funny was going on.The companies were awarding the options later but then marking the awards to earlier dates, when the stock's price was low.The total compensation to executives granted back-dated options was either unchanged or, perhaps, lower than it would have been, since people tend to irrationally over-value a bird in hand (in the money options) to a dozen in the bush (out of the money options).