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In order to lock in a profit on day one of an options grant, some executives simply backdate (set the date to an earlier time than the actual grant date) the exercise price of the options to a date when the stock was trading at a lower level. In this article, we'll explore what options backdating is and what it means for companies and their investors. Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued.

This means they must wait for the stock to appreciate before making any money.

Clearly, for those who own shares in companies that don't play by the rules, options backdating poses serious risks.

If the company is punished for its actions, its value is likely to drop substantially, putting a major dent in shareholders' portfolios.

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The well-known data storage company allegedly manipulated its stock options grants to ensure profits for its senior executives and then failed to inform investors, or to account for the options expense(s) properly.

The Bottom Line Although more culprits in the options backdating scandal are likely to emerge, because standards such as Sarbanes-Oxley have been instituted, the assumption is that it will be more difficult for public companies and/or their executives to hide the details of equity compensation plans in the future.

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