CEO Options: Luck — or something else?

The WSJ streak of taking very interesting columns and hiding them on Saturday continues.

Yesterday, they asked: Are some CEOs reaping millions by landing stock options when they are most valuable amatter of dumb luck — or something else?


"On a summer day in 2002, shares of
Affiliated Computer Services Inc. sank to their lowest level in a year.
Oddly, that was good news for Chief Executive Jeffrey Rich.

annual grant of stock options was dated that day, entitling him to buy
stock at that price for years. Had they been dated a week later, when
the stock was 27% higher, they’d have been far less rewarding. It was
the same through much of Mr. Rich’s tenure: In a striking pattern, all
six of his stock-option grants from 1995 to 2002 were dated just before
a rise in the stock price, often at the bottom of a steep drop.

lucky? A Wall Street Journal analysis suggests the odds of this
happening by chance are extraordinarily remote — around one in 300
billion. The odds of winning the multistate Powerball lottery with a $1
ticket are one in 146 million.

Suspecting such patterns aren’t
due to chance, the Securities and Exchange Commission is examining
whether some option grants carry favorable grant dates for a different
reason: They were backdated. The SEC is understood to be looking at
about a dozen companies’ option grants with this in mind.

Journal’s analysis of grant dates and stock movements suggests the
problem may be broader. It identified several companies with wildly
improbable option-grant patterns. While this doesn’t prove chicanery,
it shows something very odd: Year after year, some companies’ top
executives received options on unusually propitious dates.

analysis bolsters recent academic work suggesting that backdating was
widespread, particularly from the start of the tech-stock boom in the
1990s through the Sarbanes-Oxley corporate reform act of 2002. If so,
it was another way some executives enriched themselves during the boom
at shareholders’ expense. And because options grants are long-lived,
some executives holding backdated grants from the late 1990s could
still profit from them today."

The chart below implies that the odds against these being random are quite high. (I guess Sarbanes Oxley didn’t root out all the corporate corruption after all).

Last week it was the mortgage resets, and this week its CEO Options. Great stories, buried on the front page — of the Saturday edition . . .

The Perfect Payday
WSJ, March 18, 2006; Page A1

How the Journal Analyzed Stock-Option Grants
WSJ, March 18, 2006; Page A5

click for larger graph:


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  1. Andrew Schmitt commented on Mar 19

    Your comment:

    “The chart below implies that the odds against these being random are quite high. (I guess Sarbanes Oxeley didn’t root out all the corporate corruption after all).”

    Note, SOX changed the reporting period for options to two days from two months. That’s why the Journals analysis only extended to 2002. Many companies now evergreen on a more strict periodic basis, i.e. every Sept or the month of the first fiscal Quarter.

    I worked at Vitesse Semiconductor during those years- the one big thing the article misses is the fact ALL employees (not just the CEO) received the favorable strike price. The article singles out CEOs when in reality all employees benefited, including yours truly.

  2. Yash commented on Mar 19

    This is a ridiculous implies CEO’s can pick bottoms (no pun intended).

  3. brian commented on Mar 19

    Backdating options? That’s just the genius of capitalism at work! (the evil genius that is-the same evil genius that’s made Regulation a bad word)

  4. cactuscactus commented on Mar 19

    I don’t know enough about this not being a finance guy, but I understand that insiders have to exercise their options or sell stock or whatnot only at certain prescribed times of the year. If it turns out that those periods are near high points, it may be evidence that insiders actually have some control over what part of the cycle their company’s shares are in. If so, then no backdating is necessary for chicanery to be taking place. However, it would be very difficult to pick the precise bottom without backdating.

  5. Ironman commented on Mar 19

    It might help to consider the odds of other unlikely events to really get a sense of how “lucky” the CEO’s in these circumstances have to be:

    Dying in a shark attack: 300 million to 1

    Having their house hit by a meteor: 186 trillion to 1

    In other words, the fix would seem to be in. As such, I can only think of two viable ways to get these results:

    1. Backdate the option award date.

    2. Manipulate the company’s stock to be at the low on the day of the option award date.

    Neither one would seem to be particularly ethical….

  6. Idaho_Spud commented on Mar 19

    It’s not quite the magnitude of shareholder theft that Kozlowski pulled off, but you might as well call it what it is.

    How is this clever options timing any different than a bank clerk embezzling money (other than the obvious fact that the bank clerk is not a CEO)?

  7. B commented on Mar 19

    SOX has only addressed part of the issue of corporate governance in America. CEOs are still bamboozling shareholders and boards. Who the hell actually is accountable on most any board? I thought SOX was supposed to change that?

    And these executive compensation companys which help develop compensation packages are run by the same monkeys at Careerbuilder. (I hate to say I found that so amusing I sent it to all of my friends and must have watched it five times)

    How in God’s name can a CEO’s compensation be based on stock options without stipulations when simple math shows a CEO can do all but destroy a company, return zero profit growth and via buy backs walk away a multi-million or billionaire after ten years all due to options.

    Options compensation should preclude buybacks or have additional stipulations to keep this type of crap from happening. How is that being a great CEO? Rob the pension fund, grow profits nary a dollar and cash you options in for millions for doing what again? Investor activism and SEC oversight needs to be improved as does CEO compensation transparency.

  8. Nyquist Capital commented on Mar 20

    WSJ Analyzes Stock Option Backdating

    The WSJ Saturday edition is quickly becoming one of my favorite reads. The weekly interview in the editorial section is well done and pulls in important people with a low public profile (past guests include Jean LePen, Newt Gingrich, Carlos Ghosn). Pag…

  9. joel commented on Mar 22

    VIX options
    I tried to purchase these at etrade but didnt see them. What is the underlying ticket symbol?

  10. scamartist commented on May 19

    “This is a ridiculous implies CEO’s can pick bottoms (no pun intended).”

    It only implies CEOs can pick bottoms of their stock looking BACK 30 or 60 days. In fact anyone can do this. This is just too slimey.

  11. Juxtaposition commented on May 20

    CEOs have all the luck

    The Big Picture: CEO Options: Luck — or something else? Great summary of a WSJ article showing surprising “coincidences” in…

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