Does backdating explain
Have compensation committees become increasingly naive about option values since the 1990s?
It is difficult for me to believe that hundreds of companies do not understand that options are not “free.” I do not find this explanation persuasive.
” Their answer: competition in the market for executives.
Tyler Cowen discusses this paper in this NY Times column.
I suspect that one reason that economists and others are tempted to adopt naivety or fraud-based explanations of particular terms in executive compensation contracts is because we are puzzled by the growth of executive compensation in the US relative to other countries (especially Europe).
Without an efficiency explanation for these practices and trends generally, it is tempting to appeal to intuitive notions of “stealing” or assert that compensation committees “just don’t get it.” This, in my mind, is a tendency not unlike the one described by Ronald Coase in the antitrust context regarding economists’ preoccupation with the monopoly problem: “If an economist finds somethingâ€”a business practice of one sort or otherâ€”that he does not understand,he looks for a monopoly explanation.
Geoff’s earlier post frames the backdating issue in terms of the important economic (and legal) questions involved.
And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.” The focus on the backdating as fraud theory, in part, appears to be a product of the same sort of preoccupation. But merely repeating the mantra of fraud a substitute for rigorous analysis of backdated options, or the larger question of trends in executive compensation more generally (and especially, across countries).
Interestingly, a recent paper by Xavier Gabaix and Augustin Landier paper addresses the question: “?
is there a reason to believe that backdating became a comparatively attractive form of fraud in the 1990s relative to other methods of accomplishing the same task?
I haven’t seen any evidence to support this claim, though it may exist.