Companies usually backdate options in order to reap tax benefits and produce greater executive compensations.However, that comes unfairly at the expense of shareholders who would probably receive lower earnings and bear the brunt of a potential deterioration in earning predictions.For example, let's assume that John Doe is the CEO of Company XYZ.When he was hired, the Company XYZ board of directors offered John an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.The artificially increased earnings, in turn, enable executives to covertly enlarge their bonuses and boost their profits from selling the stock.Historically, practicing backdating was possible because reporting the issuance of employee stock options to concerned authorities (such as the SEC) was allowed to take place within a relatively long period of time (two months) after the actual grant date.
Nowadays, backdating is no more practically possible, as companies are required to report option grants to authorities within a very short period of time (typically two business days).
In our example, backdating the options is the same as giving John Doe a check for ,000 -- without recording that ,000 on the income statement as compensation.
That, in turn, understates the company's expenses and overstates its profits, which is a violation of generally accepted accounting principles and has been the grounds for a variety of fraud and miscellaneous charges from federal, state and local regulators.
These example sentences are selected automatically from various online news sources to reflect current usage of the word 'backdate.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. In the finance world, backdating usually refers to the practice of changing the dates of option grants to one that is earlier than the actual grant date in order to place a lower exercise price on the options and thus enhance the potential profits from the exercise of those stock options.
The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results).