What John Mack’s $40M Tells Us About Backdating

Posted by John Carney, Dec 15, 2006, 3:16pm

One of the most misguided notions about backdating holds that the practice typically worked in exactly the opposite way it typically did. Because of confusing accounts in the financial media, lots of people seem to believe that companies were first making decisions about how many stock options to grant their executives, and then sneakily inflating the value of those options by pretending they were granting them on an earlier date. In fact, some of you reading this probably thinks that’s how it worked.

But you know what? That’s not how companies grant options at the highest levels. They do it like Morgan Stanley did. And how’s that? Well, let’s look at it this way: do you think that Morgan Stanley’s compensation committee got together and said, “Hey. I think John Mack deserves 461,821 shares of common and options to buy 178,945. Get the accountants to figure out what that’s worth.”

Of course not. You know that what happened is this: the board decided to give John Mack a $40 million bonus, and afterwards figured out how many shares that equaled at the current stock price.

And that’s how backdating typically operated. A board would decide to give an executive a bonus worth a certain amount, and then figured out how many stock options it needed to dish out to equal that amount. Pushing the date of the grant back to a day when the stock was trading a lower price simply allowed them to grant fewer options—since those they were now worth more. What’s more, they showed up as lower cost on the companies balance sheets and didn’t provoke immediate taxes for the recipient the way an “in the money” option would have.

In short, backdating (for the most part, probably) wasn’t a way of inflating executive pay. It was a way of paying executives exactly what the board wanted to with less cost to the company and the executive.

0Recommend this! 4Comments
Posted in: Back Dating

Comments

Posted by Random Banker, Dec 15, 2006 4:24PM

This back dating "scandal" is the most inane waste of time the press has come up with since the last time they decided to complain about other people making more money than them. Does this materially affect the company’s cash flow? No?... so who cares. Should Steve Jobs be fired for back dating... well clearly! I mean who are if he drove a 1000% return for Apple share holders over the last 5 years, he screwed up an arbitrary accounting rule which isn't even technically illegal, throw him out!

This entire subject is so stupid it makes my spleen hurt.

Posted by Johnny Options, Dec 15, 2006 10:46PM

Who are you kidding?

Back dating options is illegal and is theft.

Actually, backdating steals less than

disguised reloading the executives with

new options when he prematurely

exercises and sells the stock.

I am sure you can just blow that one off

too, if you can grasp the concept.

John

Posted by Random Banker, Dec 16, 2006 10:20AM

I assume what you mean is the failure to disclose options back dating is illegal?

Ok, fine.

Apple's LTM EBITDA is about $3bn. I wouldn't care if Steve Jobs took a $100mn out of Apple's Bank account and flushed it down the toilet. Are they manipulating their earnings? Yes. Do I care? No. This shit simply isn't material, I assume every CEO is manipulating earnings. However, unless there is massive fraud on the scale of capitalizing operating expenses, as with WorldCom, this manipulation has no significant impact on the cash flow of the corporation. To fire someone like Steve Jobs for back dating is like curing the disease by killing the patient.

This level of the offense in terms of a normal employee is akin to taking home a office supplies or using the corporate expense account for personal expenses. Is it Illegal? Yes. Is it morally wrong. Sure, I guess. Is the fact that employees are stealing toilet paper material to me as an equity investor? NO, its not!

Next time you take home a stapler, or pen from the office, make sure whoever you work for properly discloses this excess compensation they're paying you. Also you'll want to put the extra income down on your taxes, so uncle sam gets his cut. Of course it won't change the value of the company but its in the interest of full disclosure.

Posted by beanspants1, Dec 17, 2006 1:28PM

are you suggesting that, if an employee stole $100 million worth of office supplies, that that would not be a firable offense?

$100m is a bit less than 10% of Apple's net 2005 profit available to shareholders.

They only spend 5 times that on R&D yearly. It's not immaterial. Should he be fired? Maybe not, but he certainly deserves a good buggering from Elliott Spitzer.


and screw you that you feel that stealing a large amount of money from the company is equivelent to stealing staples, just because the guy is CEO. the feds feel differently. you might want to look up the amt stolen to qualify for a "felony" vs the amt stolen to qualify for a "misdemeanor", chief.

Post Your Comment