Backdating issue

As a preliminary step in explaining the Commission's response to the problem of fraudulent options backdating, it would be useful to put the whole topic of options compensation into some perspective.

As a Member of Congress at the time, I well remember that the stated purpose was to control the rate of growth in CEO pay.

The million-dollar cap on the tax deductibility of executive compensation, which I mentioned earlier, doesn't apply to options granted at fair market value.

So for companies that wanted or needed to pay compensation in excess of

As a Member of Congress at the time, I well remember that the stated purpose was to control the rate of growth in CEO pay.

The million-dollar cap on the tax deductibility of executive compensation, which I mentioned earlier, doesn't apply to options granted at fair market value.

So for companies that wanted or needed to pay compensation in excess of $1 million per year, the tax code outlawed deducting it if it was paid in a straightforward way through salary, but permitted a deduction if the compensation was paid through at-the-money options.

There are other accounting and tax reasons, as well, that stock options over the years were increasingly included in the compensation packages of executives and non-executives.

Beginning in 1972, the accounting rule was that employee stock options wouldn't have to be shown as an expense on the income statement-so long as the terms were fixed when the option was granted, and so long as the exercise price was equal to the market price on that day.

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As a Member of Congress at the time, I well remember that the stated purpose was to control the rate of growth in CEO pay.The million-dollar cap on the tax deductibility of executive compensation, which I mentioned earlier, doesn't apply to options granted at fair market value.So for companies that wanted or needed to pay compensation in excess of $1 million per year, the tax code outlawed deducting it if it was paid in a straightforward way through salary, but permitted a deduction if the compensation was paid through at-the-money options.There are other accounting and tax reasons, as well, that stock options over the years were increasingly included in the compensation packages of executives and non-executives.Beginning in 1972, the accounting rule was that employee stock options wouldn't have to be shown as an expense on the income statement-so long as the terms were fixed when the option was granted, and so long as the exercise price was equal to the market price on that day.And for growth companies, the use of stock options as compensation offers a way to conserve resources while attracting top-flight talent in highly competitive markets.All of these factors have contributed to the now-widespread use of stock options as compensation.And of course there were other reasons, many of them good ones with solid economic rationales, that companies wanted to use options as a form of compensation.For example, a properly-structured option plan can be useful in more closely aligning the incentives of shareholders and managers.Very recently, we enacted new rules that will require, beginning with the next proxy season, the full disclosure of all aspects of executive and director pay and benefits.A key component of that disclosure will be compensation in the form of stock options, which has been a fast growing portion of executive pay since the early 1990s.

million per year, the tax code outlawed deducting it if it was paid in a straightforward way through salary, but permitted a deduction if the compensation was paid through at-the-money options.

There are other accounting and tax reasons, as well, that stock options over the years were increasingly included in the compensation packages of executives and non-executives.

Beginning in 1972, the accounting rule was that employee stock options wouldn't have to be shown as an expense on the income statement-so long as the terms were fixed when the option was granted, and so long as the exercise price was equal to the market price on that day.

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