>Backdating options - that's sleazy. It gives the CEO an incentive to make the stock perform badly at least once a year, which is the opposite of what options are meant to do.<
Exactly—allowing backdating is tantamount to making insiders short their company’s stock until the grant date is established. Fortunately, the 48-hour reporting rule established in 2002 makes backdating difficult to conceal, and the WSJ article notes that backdating has been reduced substantially since then.
The question that persists: To what degree should companies be allowed to time their option grants (without backdating) to coincide with a decline it the stock price? Timing grants at a low point in the stock price is not a securities violation, but perhaps the SEC will eventually change the rules to require companies to grant options on pre-specified dates.
I would welcome such a change. It’s perfectly OK for a company itself to buy back shares when management perceives the stock price is low—all shareholders benefit from such an action. On the other hand, timing option grants to coincide with a low point in the stock price benefits only the grant recipients.
As an aside, say we have two identical companies, A and B, that differ only in their policy about the timing of option grants. Company A grant its options on a set date each year that is spelled out in the options plan filed with the SEC, while company B times its option grants to occur when management thinks the stock price is low. Clearly, the options given out by company B will be worth more, on average, than those given out by company A. Hence, a comparable compensation package between companies A and B would require that the number of options given out by company B be substantially less than the number given out by company A.
An SEC rule requiring that options be granted on pre-specified dates would make it easier for investors to gauge the expected amount of dilution from future grants and would thereby make valuation models more accurate.
Market Data 
Markets 
AI
