In an earlier piece we discussed the issues surrounding the growing practice of corporations “grossing up” various payments due their executives in an attempt to shield them from further tax consequences.

Now Charles Forelle and James Bandler in the Wall Street Journal report on the purported practice of “backdating option grants” for exectutive so as to maximize their value for the executives who receive them. Indeed some academic research has documented this pattern. The SEC is supposed to be investigating a number of companies and their option granting practices. notes the academic research on the topic and provides a legal perspective on the practice of backdating:

There’s nothing inherently illegal about either paying large compensation or even backdating an option contract, so long as proper corporate procedures were followed and the grant does not amount to a waste of corporate assets. Where public corporations are concerned, however, failure to disclose the backdating likely would constitute securities fraud. In particular, failure to do so probably would constitute a material omission with respect to the executive compensation disclosures required in the proxy statement for the corporation’s annual meeting.

Truth on the Market finds the arguments against the practice less powerful. Indeed the practice may not be “stealing” from shareholders and may provide executives with a powerful incentive. Indeed the solution, further federal rules and regulations on corporate governance practices, may be more painful than the problem itself.

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