Option Backdating

Option backdating refers to a practice that was once common in executive compensation in which firms granted executive stock options (ESOs) to an executive on a particular date but reported that the grant occurred on a previous date. This practice was employed so that the firm could convey additional compensation to an executive without appearing to have done so. This method was employed extensively in the high-tech industry, particularly during periods of very rapid stock price increases.

To a considerable extent, the practice of option backdating resulted as an unintended consequence of laws aimed at curbing executive compensation, but the growing importance of ESOs actually had the effect of increasing executive compensation. In 1994, section 162(m) of the tax code came into effect and specified that ...