Refer to the In Action discussion of options backdating. If stock options and other forms of performance based compensation result in some managers engaging in unethical or illegal behavior, why do firms still use them?
Options Backdating at Apple
Stock options are a popular compensation tool used to motivate senior executives. Recently, executives at several companies have been accused of setting an earlier date for an option grant than the day the option actually is awarded. (If the stock price had been rising, this would increase the value of the option to the executive.) Such a decision requires the firm to recognize as cost of compensation the difference between the stock price on the date of the grant and the stock price on the earlier date indicated. Failure to do so is potentially fraudulent. One company accused of backdating is Apple, Inc. Two senior executives, the general counsel and the chief financial officer, settled charges with the Securities and Exchange Commission (SEC) over the matter. After an internal investigation, Apple’s Board of Directors, “admitted to frequent backdating but exonerated [CEO Steven P.] Jobs— in part because Jobs ‘did not appreciate the accounting implications’ of backdating.” (Because the backdating took place in 2001, the CEO was not required to attest to the financial statements, indicating his knowledge of the accounting implications of transactions.) Part IV.2 of the Code of Ethics of the Institute of Management Accounting (see Appendix) requires members to: Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. The former CFO claims that he “warned Jobs at the time that Apple would likely need to take an accounting charge if it issued options on any day other than January 2.”