A federal investigation of companies that allegedly backdated employees' stock options already involves more than 100 companies, and it has prompted the Securities and Exchange Commission (SEC) to require more disclosure of executive pay.
For HR professionals, the scandal could result in more work and possibly more of a voice in future internal discussions about executive compensation.
Background: Backdating, which is not illegal, involves giving an employee the right to buy stock in the future at a price that was set in the past. That allows the employee to buy stock at a discount but sell it at its current value for a large profit.
What's illegal is failing to disclose and properly account for backdated options.
In its investigation, the SEC has accused some executives of using the scheme for personal profit. But some CEOs defend the practice, saying it is among the most effective recruiting tools.
The SEC says not disclosing backdated stock options can misrepresent the company's financial position and could be considered fraud. This summer, the SEC began cracking down on companies that do it.
Caught in the snare are HR managers, whom the SEC, in some cases, is accusing of doctoring financial records to reflect inaccurate dates, which in turn can boost their executives' compensation.
Over the summer, the SEC decreed that corporations must supply clearer information in the annual report and proxy statement about their top five executives' salaries and benefits and about how their stock options are priced. (Read more at www.sec.gov/news/press/2006/2006-123.htm.)
Outlook: Those recent SEC actions could force more organizations to include HR professionals in their discussions of executive compensation. On the flip side, these SEC actions could cause the reverse effect by encouraging more employers to move compensation out of HR and into the corporate finance department.