CEO Options: Luck -- or something else?

Sunday, March 19, 2006 | 11:45 AM

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.

His 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.

Just 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.

The 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.

The 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:


Sunday, March 19, 2006 | 11:45 AM | Permalink | Comments (9) | TrackBack (2) add to | digg digg this! | technorati add to technorati | email email this post



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» WSJ Analyzes Stock Option Backdating from Nyquist Capital
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... [Read More]

Tracked on Mar 20, 2006 11:16:41 AM

» CEOs have all the luck from Juxtaposition
The Big Picture: CEO Options: Luck -- or something else? Great summary of a WSJ article showing surprising "coincidences" in... [Read More]

Tracked on May 20, 2006 7:12:30 PM


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.

Posted by: Andrew Schmitt | Mar 19, 2006 12:56:39 PM

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