Backdating and Employee Compensation Management

Last week, former Brocade CEO Gregory Reyes was sentenced to 21 months in prison and fined $15M, making him the second executive to be punished in a Justice Department stock option “backdating” dragnet that so far has ensnared more than 200 companies. 

Backdating is about questionable executive decision-making and fraudulent stock accounting, but it also shines a light on employee compensation management, a hot topic in business in 2007.  Reyes’ crime was ordering employee option grants to be altered such that when the stock was sold, employees would realize a greater financial gain than should have been possible.  Backdating is legal when properly disclosed, but a failure to do so can result in concealed costs and inflated profits that impact how much employees and executives are paid. 

Compensation systems that manage employee and executive pay are a valuable form of company oversight and protection for investors.  The ability of Boards and finance managers to closely monitor when option grants are offered and revised can go a long way towards troubleshooting problems before they spiral out of control.  Case in point:  The Brocade incident wiped out hundreds of millions of dollars in company profits after its books were restated due to the backdating scandal. 

The most advanced compensation management systems track everything from employee salary and stock awards to non-cash incentives.  Related systems enable employees themselves to access, view, model and manage all of their corporate-sponsored compensation and financial benefits.  Theoretically, this would help to prevent an employee’s stock options award from changing without his or her knowledge.

As more backdating cases go to trial in 2008, compensation management will continue to be thrust into the spotlight.  Companies can mitigate employee and investor concerns over these issues by proactively monitoring compensation practices and procedures.