The NASPP Blog

April 19, 2011

Backdating, Auditors, Lotteries, and Employee Performance

Today’s blog looks at a couple of random topics that showed up in my recent Google alerts: 1) options backdating and lawsuits against auditors and 2) yet another study on stock options and employee performance.

Are Your Auditors Going to Get Fussier?
Option backdating stories are few and far between these days, but a new development showed up in my Google alert this week. A federal appeals court has ruled that investors can move forward with a lawsuit against Ernst & Young over Broadcom’s option backdating scheme. The ruling reverses a lower court decision dismissing the case.

The lawsuit alleges that Ernst & Young should have investigated deficient and missing documentation relating to Broadcom’s option grants. At this point, the lawsuit has a long way to go–the ruling just allows the suit to proceed, there has been no finding or judgment against E&Y and perhaps there won’t ever be. Nevertheless, I think it’s intriguing that the lawsuits over option backdating have now extended to auditors. I’ve talked to many a stock plan administrator who has felt a bit put upon with respect to the documentation requested by their auditors, and that was before the options backdating scandal. I imagine the documentation requests have already gotten more onerous and, if this lawsuit goes much further, I can only anticipate that auditors will tighten up the documentation requirements even further.

Stock Options=Lottery Tickets=Grateful, Hardworking Employees
The debate over whether stock options incent employee performance slogs on. The latest rebuttal is the paper, “Stock Option Exercise and Gift Exchange Relationships: Evidence for a Large US Company” by management professor Peter Cappelli and Martin J. Conyon, senior fellow at Wharton’s Center for Human Resources.

The study posits that stock options motivate employees to work harder, but not in the way employers most likely hope. Instead of working harder to increase the stock price before they exercise, employees view options more like lottery tickets. But, if they get “lucky” and are able to exercise for a profit, employees will work harder in the period following their exercise–often for over a year–in gratitude to the company for the payout they received.

The study examined exercise patterns and job performance of 4,500 managers at a large U.S. public company (unnamed). While the sample size of employees certainly seems large enough, the results would be more interesting to me if the study had looked at more than one company. The authors don’t seem to acknowledge the differences that education (both in terms of the stock plan and company financials) and corporate culture might have on how employees view their stock options and how that influences their performance. It would also be interesting to know if the results translate to restricted stock or RSUs, which guarantee a payout to employees.

It’s Not Too Late for the Online Fundamentals
The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” began last Thursday, April 14, but it’s not too late to participate. All course webcasts have been recorded and archived for you to listen to at your convenience.  This is a great program for anyone new to the industry or anyone preparing for the CEP exam. Register today.

Online Financial Reporting Course–Only Two Weeks Left for Early-Bird Rate
There are only two weeks left to receive the early-bird rate for the NASPP’s newest online program, “Financial Reporting for Equity Compensation.” This multi-webcast course will help you become literate in all aspects of stock plan accounting, including the practical considerations and technical aspects of the underlying principles.  Register by April 29 for the early-bird rate.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara