The Wall Street Journal (see discussion of article below) pointed out a CEO option grant dated October 1998.
The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.
This process makes the granted option in-the-money and of value to the holder.
This process occurred when companies were only required to report the issuance of stock options to the SEC within two months of the grant date.
Options backdating defeats the purpose of linking an executive's compensation to the company's performance, because the bearer of the options will already have experienced a gain.
In the past, granted options were only required to be disclosed to the Securities and Exchange Commission (SEC) within two months of the options being granted, which gives companies a window for backdating.
Signal To convey information through a firm's actions.
ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date.
Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.
Awarding employees with stock options those are dated prior to the actual grant date.
The date chosen could be one when the company’s stock was at a low, so the options can be in-the-money at the time of granting itself.