NewMexiKen knew of course what stock options were and what they’re for, but I remained in the dark about the recent scandal. James Surowiecki has written a brief explanation for The New Yorker. It included this background:
The most common stock options are known as “at the money” options, which let you buy the company’s stock at the price that it had on the day of the grant. They’re valuable only if the stock price rises after you get them. The companies involved in the recent scandal were backdating options to a time when the stock price was lower, making them immediately lucrative. As it happens, companies are perfectly free to issue options priced below the current market: those are called “in the money” options, and they’re worth something right when they’re issued. (If you’re given an option with a strike price of ten dollars when today’s stock price is fifteen dollars, each option can yield an immediate profit of five dollars.) But there’s a rule that companies have to follow when they issue “in the money” options: they have to disclose it in their financial statements.
The backdating companies broke this rule: they reported how many options they were issuing, but conveniently omitted the fact that they had been backdated. In Washington, people say that it’s not the crime that gets you—it’s the coverup. In the case of backdating, the only crime was the coverup.
There’s more detail, including this: “[T]he scandal has metastasized, engulfing more than a hundred companies, sparking criminal indictments, and forcing the departure of high-profile executives.”