During the euphoric high-tech boom of the 1990s, America Online offered my daughter a thousand stock options to recruit her away from another firm. In 2001, after four years of vesting, that gave her the right to buy those shares at the price on the day the options were granted. But what day should that be?
Weeks passed, as usual, between her initial interview and subsequent appointments with various supervisors, the time a formal offer was approved and transformed into a written contract, and the time (after due notice to her current employer) she finally started the new job. Which of those dates would have been the correct one for AOL to use as the grant date for her stock options? Should it be the day she was first interviewed, the day she started work, somewhere in between or perhaps a few weeks later?
Be careful how you answer, because some eager reporter is likely to dub any of those choices as "spring loading" or "bullet-dodging" or "backdating." A prospective employee, on the other hand, might view the wrong choice as unfair, or even as reneging on the original deal.
Millions of rank-and-file employees, not just top executives in the S&P 500 firms, have gladly accepted the unavoidable tradeoff between risk and reward by accepting part of their pay in the form of stock options. If the stock does well, shareholders and employees will share in the gain -- if not, they share the pain.
A 2001 study by Federal Reserve economist Nellie Liang and Scott Weisbenner of the University of Illinois found that by 1999 the top five executives received only 14 percent of all stock options grants. The Fed's Survey of Consumer Finances reported, "In 2004, 9.3 percent of families reported having received (employee) stock options, a share 2.1 percentage points below the (11.4 percent) level in 2001."
Employee stock options are obviously very important to millions of people. Yet the press keeps trying to equate stock options with a few dozen overpaid CEOs and to demonize options in general with the so-called "scandal" of backdating. Any presidential candidate who contemplates jumping on that bandwagon had better be prepared to lose votes from 9 percent to 11 percent of America's families.
Journalists use the word "scandal" to convert legal and sometimes sensible business practices into something vaguely immoral. Backdating of employee stock options is defined as a "scandal" precisely because efforts to criminalize possible accounting indiscretions have become so chaotic and quixotic.