Backdating Gains Found Modest

How much extra money did top executives reap from the backdating of stock options?

Not much, according to a report published last week by three University of Michigan researchers.

The report estimated that backdating lifted the value of the average executive’s annual option compensation 1.2% to 6.1% from 2000 to 2004.

In one of the most notorious cases of alleged option abuse, former Comverse Technology Inc. Chief Executive Jacob Alexander is accused of netting about $6.4 million through backdating schemes from 1991 through 2005, according to a federal criminal case filed against him last month.

But that’s just 5% of the $138-million profit that Alexander, who now is a fugitive, made exercising options in that period.

“The dollar amounts involved are not that significant,” said Patrick McGurn, a corporate governance expert at investor advisory firm Institutional Shareholder Services in Rockville, Md.

But that is beside the point to investors who believe that backdating constitutes fraud because it wasn’t disclosed to shareholders, McGurn said.

There are two main reasons the average gain from backdating may be relatively modest.

Say a company awarded a stock option to an executive at $10 a share when the stock price on the actual day of the award was $15.

In the 1990s, when stocks were mostly rising, the price at which the executive ultimately sold the shares might have been so far above $15 that the extra $5 from backdating would have been a small bonus.

By contrast, from 2000 through 2002, when the stock market was falling -- particularly technology shares -- a backdated option award might have provided no benefit at all to the recipient. The award might have sported a gain on paper at the time of the grant, but that gain might have evaporated by the time the employee was permitted to sell the shares. (Options normally vest over a period of years.)

Corey Rosen, director of the Oakland-based National Center for Employee Ownership, a group that tracks option trends, said that regardless of the dollar amounts involved with backdating, revelations about the practice have reignited anger over executive pay in general.

In the boom years of the 1990s, Rosen said, some investors’ attitude was “I don’t care how much so-and-so gets as long as my stock price goes up.”

But that mentality died with Wall Street’s bear market of 2000-02, he said.