Stock Option Backdating


Rambus preliminarily estimates that the aggregate pre-tax, non-cash stock-based compensation charges in connection with these stock option grants will be in excess of $200 million. Also as a result of the investigation, Rambus has been unable to file its quarterly report on Form 10-Q for the period ended June 30, 2006, and will not be in a position to file its quarterly report on Form 10-Q for the period ended September 30, 2006 on November 9, 2006.

On August 30 MIPS Technologies, Inc. announced that following a company initiated voluntary review of historical stock-based compensation practices and related potential accounting impact. On Oct. 25 MIPS announced that due to the continuing internal investigation, MIPS would not be releasing first quarter fiscal 2007 earnings at this time.
“Though the investigation by the special committee remains ongoing, the special committee has reached a determination that, different measurement dates should have been used for computing compensation costs for certain historic stock option grants than those used in the preparation of the Company's historical financial statements. The special committee has not yet completed its investigation to allow for the final determination of the proper measurement dates, and, therefore, the Company has not determined the amount of additional compensation expenses that will be recorded. Nonetheless, the Company has determined that its historical financial statements included in reports that it has previously filed with the SEC will need to be restated.”

Executive Greed

Bernie Ebbers, Ken Lay, Jeff Skilling and Dennis Kosolowski were convicted of crimes associated with the collapse of WorldCom, Enron and Tyco International respectively. They are the poster boys for bad behavior by executives. However, the compensation and/or retirement packages of generally admired executives (Jack Welsh, Richard Grasso, and Lee Raymond) have also raised concerns.

The legendary Jack Welsh, former CEO of General Electric, was forced to pay back some of the perks of his retirement package when they were disclosed in a messy divorce fight.

Richard Grasso was the head of the SEC, a non-profit watch-dog of publicly traded companies. During Grasso's eight years as NYSE chairman, between 1995 and 2003, the exchange added 1,549 new listings -- more than 60% of its current slate, including hundreds of foreign companies. Market capitalization of companies listed on the NYSE more than doubled to $14.8 trillion. Yet he came under fire for $180 million in his Supplemental Executive Retirement Plan (SERP). New York Attorney General Eliot L. Spitzer filed suit. In his ruling NY Supreme Court Judge Ramos wrote “It is shocking that a fiduciary of any institution, profit or not-for-profit, could honestly admit that he was unaware of a liability of over $100 million … is a clear violation of the duty of care.” It remains unclear how much Mr. Grasso will have to repay. He will likely appeal the decision.

Lee Raymond, former Exxon CEO and Chairman, was granted a $400 million retirement package at a time when the cost of gas was reaching an all time high. When you look at Exxon's $36 billion in profits, the $400 million is a drop in the bucket. Many Exxon shareholders may feel that Mr. Raymond had earned this bonus. It is when you compare the amount to what you and I earn, that it becomes a public relations problem.

To what degree were the successes of Exxon and GE due to their now retired chief executives? Didn't most oil companies have banner years? Would Mr. Raymond be justified in complaining if he received only $200 million? Would he work (he's retired) less earnestly for Exxon in the future, if he had received a smaller sum?

According to the Corporate Library the average CEO of an S&P 500 company made $13.5 million in total compensation. This is about 400 times the average worker, up from 42 times in 1980.

Executive are like ballplayers. When Alex Rodriquez signed a $252-million contract with the Texas Rangers in December of 2001, the other ballplayers didn't argue that he was not worth it. Instead they saw it as setting a new pay standard. They then claimed that they were worth one-half, one-quarter or one-tenth as much as Alex. Today's LA Times reports that Dodger outfielder J.D. Drew opted out of the remaining 3 years of his 2004 contract ($11 million/year) to try free agency. Executive compensation committees also look at the compensation packages of similar companies. In the case of professional athletes there is an opposing force, namely the owners who must sign the checks, even though some owners seem to go overboard and become infatuated with signing free agents or college seniors at astronomical figures. In the case of Boards of Directors, they are often composed of other CEOs, who as a class benefit from rising executive compensation. Further, their continued presence on the board was often contingent on approval of the CEO. Companies have recently moved to add independent members to their boards.

If you are the owner of stock options you might be interested in the tax implications for the recipients of stock options. The tax laws for individuals on stock options is that if the stock is held for more than two years after the date of the grant and more than one year after the data of exercise, then all gain made on the sale of the stock is considered long-term gain. If the holding period is not met, then the difference between the option price and the fair market value of the stock at the time it was recognized is treated as ordinary income. Any excess gain resulting from the subsequent sale of the stock is treated as short- or long-term capital gain depending on how long the stock was held after the options were exercised. The tax rate is generally better on long-term capital gains versus either short-term capital gains or ordinary income.

Generally, the exercise of ISOs results in an AMT (Alternate Minimum Tax) adjustment. This adjustment is equal to the difference between the option and the fair market value of the stock on the date of exercise. This increases the alternate minimum taxable income in the year of exercise. AMT must be paid if it exceeds the regular tax liability. A negative adjustment occurs in year the shares are sold. This becomes potentially eligible for AMT credit in future years but only if the AMT tax liability exceeds the regular tax liability in a given year.



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