2006 Headlines

Cornell Study Finds Backdating Options Is linked to 10% Increase in CEO Pay

November 17, 2006 | Ithaca, NY - A newly completed study by Professor Yaniv Grinstein and his co-authors at Harvard Law School and INSEAD recently completed a study that investigates opportunistic timing of option grants during 1996-2005. The research continues Grinstein's line of research on executive compensation. The study finds that approximately 1150 "lucky grants" - defined as grants given at the lowest price of the month - were manipulated during the period 1996-2005. Other findings from the study include:

Lucky grants were more likely when the company did not have a majority of independent directors on the board and/or the CEO had longer tenure-factors that are both associated with increased influence of the CEO on pay-setting and board decision-making.
Grants were more likely to be lucky when granted in months in which the potential payoffs from manipulation were higher.
Luck was persistent: a CEO's chance of getting a lucky grant increases when a preceding grant was lucky as well.
About 43% of the lucky grants were "super-lucky," having been given at the lowest price not only of the month but also of the quarter, and the researchers estimate that about 62% of them were manipulated.
Grant manipulation is widespread across old economy firms and not merely a practice utilized by new economy firms. In fact, a majority of the manipulated lucky as well as super-lucky grants were awarded by old economy firms.
The average gain to CEOs from grants that were backdated to the lowest price of the month exceeds 20% of the reported value of the grant and increases the CEO's total reported compensation for the year by more than 10%.
Firms that backdated options did not reduce compensation paid through other sources.

To view a copy of the report or to speak with Professor Grinstein about this research, please contact:

Deirdre Snyder
Public Relations Officer
The Johnson School at Cornell University
Email: dgs37@cornell.edu
Phone: 607.255.3494
Cell: 607.592.2188