First service backdating stock options
New rules under the Sarbanes-Oxley Act have reduced the practice to 10% of the companies granting options.
Only 7.7% of companies filing within the new two-day reporting window for options grants show a pattern of backdating, compared to 19.9% of companies that did not meet the requirements.
Any gain a company makes is assumed to be the sole result of the extraordinary wisdom of this one very special person, not the collective efforts of hundreds or thousands of employees.
It's demonstrably bunk, but then the people setting executive pay operate in a parallel universe.
Despite all the editorials, all the accounting rule changes, and all the new laws, nothing much seems to change except the particular manner in which so many executives get overpaid.
Chances are this particular practice will now go away, but another one will surface all too soon.
As important as the issue of executive equity compensation is, it should not blind us to a more important concern.
Research has definitely shown that broadly-granted equity awards improve corporate performance; concentrated grants force it down (the details are in the article Broadly Granted Stock Options Improve Corporate Performance).
The theory seems to be that a good CEO is worth any price a company will pay, no matter that the compensation might literally exceed the GNP of some countries or be enough to hire hundreds of talented employees.
Microsoft acknowledged doing this in 1999, stopped the practice, and restated its financials.