Professor Bainbridge...on law, politics, religion, culture & food

You use that argument to defend backdating options?
A blatantly unfair and inequitable ploy with no justification (unless applied universally) other than to to profit greedy executives?

Your legal argument may be valid, but whatever happened to ethics?

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Your legal argument may be valid, but whatever happened to ethics?

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[T]here is not even a patriotic duty to increase one’s taxes

My understanding:  sometimes tax law is written a certain way to encourage particular investments, charitable contributions, financing arrangements, etc.  It’s clear that the law allowing people to deduct mortgage interest is meant to encourage people to take out loans.  Ditto the laws making charitable contributions tax deductible.  In those cases it’s not only ethical to take the lower taxes, it’s the whole reason the law exists.

What about cases where people “take unfair advantage” of the tax system?  Well, Congress still has the ability to change those laws if they think there’s abuse.  It may even be Congress’s goal to encourage executives to take payment in stock instead of taxable interest because doing so is believed to improve company performance (if Ken Lay only received pay in stock, would he have allowed the stock to tank?).  If so, then structuring compensation packages according to Congress’s indent is not only legal, but patriotic and ethical.  If not, then Congress can fix the law.  The IRS still reserves the right to declare “blatantly unfair and inequitable ploy[s] with no justification” abusive tax shelters.

Just noticed two typos that may not be obvious.  Should be “taxable income” not “taxable interest” and “Congress’s intent” instead of “Congress’s indent.”

Well, Max, I don’t know if you are being disingenuous or if you just don’t understand the issue.

My comment has nothing whatsoever to do with whether compensating executives with stock is a good idea or not, regardless of Congress’ social engineering philosophies.

Where do you think the money comes from when an executive makes extra profit on a backdated option? Thin air? It is the company itself that has to purchase the stock when an option is exercised, so the difference in price between the option issuance value and the market price is paid directly by the company, and comes straight off the bottom line. If that difference is made greater through a bookkeeping trick, the extra profit made by the option holder is essentially a straight payment from the company. This defrauds every single stockholder (including the option holder himself, if he owns any stock), who would otherwise see that extra money realized as higher profits, dividends, or reinvestment, increasing the value of the company. Instead that extra cash goes straight into the pocket of this ‘preferred’ option holder, through nothing more than a bookkeeping trick.

Actual owners of stock, on the other hand, do not have the option of magically making the spread between the price at which they purchased the stock and today’s market value of said stock greater, the difference being funded directly by the company.

This is nopthing more than a trick to pay more to executives without the rank and file noticing. If executive compensation need to be raised to attract talent, then by all means companies should be allowed to raise it, with higher salaries or larger option grants. But sneaking what is essentially a direct payment from the company to an employee in under the radar as an option backdate (and therefore bypassing applicable taxes) is nothing short of gaming the system and defrauding all the other investors who do not get the same favorable exclusive treatment.

As I implied before, it may be legal, but it is hardly ethical. Seems the latter doesn’t mean too much to anyone.