Backdating: Microsoft's July problem

I’ve been quiet about the backdating so-called scandal because there doesn’t seem to me to be much interesting there. If the companies disclosed and accounted properly for the options, probably no problem. After all, the board has considerable discretion over executive compensation, particularly after Disney. If they didn’t disclose, probably a problem. This emphasis on disclosure is the gist of Prof B’s recent TCS column.

But a WSJ story today about backdating-like conduct at Microsoft more than a decade ago makes me wonder if it's more complicated.

Apparently Microsoft for awhile granted options at the July low every year, and for new employees the low for the 30 days after they joined. When MS learned they weren’t following GAAP, or that it wasn’t standard practice, they disclosed it (in 1999) and took a charge. Perhaps MS didn’t disclose before they did it, but they did disclose the practice seven years ago and they did take the charge. So maybe there was some nondisclosure along the way, but is this old news really a big deal?

Apparently yes, says John Coffee. According to the story, he said that “executives could have had a ‘perverse desire’ to see the stock go down between July 1 and July 31 or in the 30 days following the start date for new hires.” In other words, it isn’t the disclosure, or at least not just the disclosure, it’s the practice itself, because of the bad incentives.

This brought to mind the image of Microsoft executives mismanaging the company every July. "It's July," they must have been saying.  "Time to write some bad code." I think I must have gotten some of that July software, sort of like Monday cars.

On the other hand, we've also heard a lot about executives driving the stock price up so they could cash in on their options.  So maybe every July they just let the stock price do whatever it wanted to do. 

On the third hand, remember that the big problem during this period was that everybody thought MS was making too much money, and getting the antitrust folks in on the act. So maybe MS was trying to get its executives to do a little worse so the company wouldn’t make so much damn money. At least in July.

On the fourth hand, given MS’s stellar stock performance during that period, giving executives the lowest July price would increase the payoffs, and therefore maybe the incentives, for exercises after price was fixed. So maybe some of that November software was enough better than the July software that it all balances out.

By now I've got a headache with these incentives.  But it might not be about incentives after all. It might be that it’s just not “fair” that executives get to, in a way, pick their price when the rest of us are stuck with fate. In  fact, it's not fair that some people got to work for Microsoft in the 90s when the rest of us were teaching, or something.

Whatever the reasoning, I hope that our regulators understand that, although executive compensation is not perfect, regulating in response to every newsworthy imperfection is not going to make it better.

Comments

[Christine Hurt]

This July practice reminds me of what a law firm recruiter told me about law firms' NALP numbers for average billable hours. The firm took the slowest day of the year -- a Monday in October when a whole crop of new associates started. On this day, you have a lot of bodies, but low billable hours. Then, calculate the per capita billable hours and annualize. Ta da -- 1843 hours. This calculation was explained to a friend of mine who had gotten her firm to agree to only require 75% billable hours in consideration of a 75% reduction of pay. After she had turned down another part-time offer from a different firm, her own firm told her that she would be required to bill 75% of the real average, not the NALP average.