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CEO Options: Luck — or something else?

Posted By Barry Ritholtz On March 19, 2006 @ 11:45 am In Corporate Management,Data Analysis | Comments Disabled

The WSJ streak of taking very interesting columns and hiding them on Saturday continues.

Yesterday, they asked: Are some CEOs reaping millions by landing stock options when they are most valuable amatter of dumb luck — or something else?

Excerpt:

"On a summer day in 2002, shares of
Affiliated Computer Services Inc. sank to their lowest level in a year.
Oddly, that was good news for Chief Executive Jeffrey Rich.

His
annual grant of stock options was dated that day, entitling him to buy
stock at that price for years. Had they been dated a week later, when
the stock was 27% higher, they’d have been far less rewarding. It was
the same through much of Mr. Rich’s tenure: In a striking pattern, all
six of his stock-option grants from 1995 to 2002 were dated just before
a rise in the stock price, often at the bottom of a steep drop.

Just
lucky? A Wall Street Journal analysis suggests the odds of this
happening by chance are extraordinarily remote — around one in 300
billion. The odds of winning the multistate Powerball lottery with a $1
ticket are one in 146 million.

Suspecting such patterns aren’t
due to chance, the Securities and Exchange Commission is examining
whether some option grants carry favorable grant dates for a different
reason: They were backdated. The SEC is understood to be looking at
about a dozen companies’ option grants with this in mind.

The
Journal’s analysis of grant dates and stock movements suggests the
problem may be broader. It identified several companies with wildly
improbable option-grant patterns. While this doesn’t prove chicanery,
it shows something very odd: Year after year, some companies’ top
executives received options on unusually propitious dates.

The
analysis bolsters recent academic work suggesting that backdating was
widespread, particularly from the start of the tech-stock boom in the
1990s through the Sarbanes-Oxley corporate reform act of 2002. If so,
it was another way some executives enriched themselves during the boom
at shareholders’ expense. And because options grants are long-lived,
some executives holding backdated grants from the late 1990s could
still profit from them today."

The chart below implies that the odds against these being random are quite high. (I guess Sarbanes Oxley didn’t root out all the corporate corruption after all).

Last week it was the mortgage resets, and this week its CEO Options. Great stories, buried on the front page — of the Saturday edition . . .

Source:
The Perfect Payday [1]
CHARLES FORELLE and JAMES BANDLER
WSJ, March 18, 2006; Page A1
http://online.wsj.com/article/SB114265075068802118.html

How the Journal Analyzed Stock-Option Grants [2]
CHARLES FORELLE
WSJ, March 18, 2006; Page A5
http://online.wsj.com/article/SB114265125895502125.html

click for larger graph:

Lucky_20060317203507 [3]


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/03/ceo-options-luck-or-something-else/

URLs in this post:

[1] The Perfect Payday: http://online.wsj.com/article/SB114265075068802118.html

[2] How the Journal Analyzed Stock-Option Grants: http://online.wsj.com/article/SB114265125895502125.html

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/lucky_20060317203507.gif

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