Grants to new employees based on inaccurate employment commencement dates are troublesome.
Options granted as of the commencement of employment based on the market price as of the date of acceptance may be problematic if the plan does not permit below-market grants or the grant is not treated as a discounted option for accounting and tax purposes.
It could also lead to delays in filing financial statements while the magnitude of the problem is determined.
Adverse tax consequences may result from option backdating practices.
Even though no documents are backdated and there may be no intent to select a lower exercise price, backdating issues may arise if the stock price increases before the corporate formalities have been completed.
But if these conditions are not met, a number of negative consequences can result, depending on the individual circumstances of the practice at issue.
Options that are granted at less than fair market value result in higher levels of compensation expense.
Options granted as of the date of employment acceptance are also troublesome if the plan does not permit grants to non-employees or if the additional tax and accounting issues relating to grants to non-employees are not adequately addressed.
A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.
SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.