An article in yesterday’s NYT describes the genesis of option backdating at Micrel Inc., a silicon valley semiconductor company:
Throughout the 1990’s, Silicon Valley companies were locked in an intense battle to recruit employees, and stock options were their primary tool.
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So when new hires began complaining that the [Micrel’s] volatile share price meant that colleagues who had arrived just days earlier were receiving stock options worth thousands of dollars more, Micrel executives moved to satisfy the troops. They raised with their auditor, Deloitte & Touche, the idea of adopting a new options pricing strategy similar to one that other tech companies, including Microsoft, used at the time.Instead of granting options at the market price on a new employee’s hire date, Micrel proposed setting the price at the lowest point in the 30 days from when the grant was approved.
It seemed like an ideal solution. The 30-day window could help Micrel attract and reward new hires on a more equal footing, while helping to retain existing employees. And if it were extended up the corporate ladder, the prospect of built-in gains and tax breaks, worth millions of dollars, could enrich senior executives.
Deloitte allegedly approved the strategy but five years later reversed course. By then, however, the practice had become the norm in Silicon Valley and perhaps ultimately led to the option backdating scandal we’re now in the midst of.
