It shows that each type of backdating less likely reflects arm's-length contracting than a desire to inflate and camouflage executive pay.To be clear, the majority of public companies handle their employee stock options programs in the traditional manner.If the exercise price of a discounted option is increased to the fair market value of the stock on the original grant date of the option (see paragraph (1) above), and the company decides to compensate the option holder in 2006 for the lost economic benefit resulting from such increase in the options exercise price, the cash or stock bonus must be subjected to a vesting schedule.The cash or stock bonus could Any cash payable pursuant to a vesting schedule would be subject to Section 409A unless the cash will be paid within two and one-half months after the calendar year in which the right to the cash payment vests.(3) Elect a Fixed Exercise Date.The fixed exercise date must be elected by the option holder no later than December 31, 2006.
Incentive Stock Options Incentive stock options ("ISOs") are required to be granted at an exercise price that is no less than the fair market value of the stock on the date of grant.
While not quantifiable in terms of dollars and cents, in some cases, the damage to the company's reputation could be irreparable.
Most businesses or executives avoid options backdating; executives who receive stock options as part of their compensation, are given an exercise price that is equivalent to the closing stock price on the date the options grant is issued.
The 20% penalty tax under Code Section 409A may also be avoided if the option holder makes an election with respect to a future date on which the discount option will be exercised.
The fixed exercise date may be any date prior to expiration date of the applicable option.