Tax consequences of backdating options

Taking a very different tack, Comverse's former CFO, David Kreinberg, last week became the first top level executive to settle actions brought by the SEC and the US Attorneys' Office since options backdating came into the media spotlight last Spring.In settling with the SEC, the former Comverse CFO consented to, among other sanctions, a permanent injunction against violation of the securities laws, a permanent bar against serving as a corporate officer or director, and payment of .4 million in disgorgement and pre-judgment interest.On the other hand, companies could make in the money grants.While they offended corporate shareholders, had to be expensed by the corporation, and had less favorable tax consequences, they had other advantages.Corporations faced pressures in two different directions — they wanted to attract and retain employees with attractive stock ownership opportunities offered by in the money grants, but they also wanted all the corporate advantages of making at the money option grants. The right thing to do was to pick one or the other.A company could legitimately choose to make highly attractive in the money grants, so long it convinced its shareholders that such grants were necessary and desirable and also complied with all of the proper accounting and tax rules.

They also generally received more favorable tax treatment.At the same time, there was sharp rise in the overall level of executive compensation (some would say astronomical), despite the million-dollar salary deductibility cap.In this environment, cash-strapped companies found stock options an attractive way to provide competitive compensation without further tapping their limited cash flows.These rules, in combination with the prescient provisions of Sarbanes-Oxley requiring timely reporting of stock option grants, will go a very long way toward preventing the kinds of problems we are seeing today from occurring to the same degree in the future.Second, in September the Office of the Chief Accountant issued guidance for companies trying to cope with the financial reporting ramifications of their various historical options practices from a reporting perspective.

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