Spring-Loaded Options and Backdated Options: What Are They?

When deciding how to put together a proper executive compensation package for directors and officers, there are many options to consider.  Executive compensation packages can include a number of options: stocks, salary, or even other perks.  Courts often have a difficult time deciding whether or not an executive compensation package is appropriate and will only pass judgment on a very deferential waste standard. However, there are two types of executive compensation options that have been rejected and deemed illegal: spring-loaded options and backdated options.

Spring-loaded options occur when directors are granted options when the stock is trading very low.  The director is allowed to exercise his option right before they make news that causes the stock to soar.  This has been deemed illegal by the courts, as it appears to be an off-shoot of insider trading.

Another option that is illegal is the backdating option.  Options are backdated when they are awarded presently now that the stock price is higher and more valuable, but they are given to the director or officer at a time when the stock was trading very low.  This has also been deemed illegal by courts, as it is obviously wasteful for a corporation to give away a stock well below the trading price.

When determining executive compensation packages, there are many options for the corporation to consider.  However, there are two options that are off limits: spring-loaded options and backdated options.  It is important to consider what type of executive compensation your corporation wishes to offer.  Consulting with an experienced legal team can help understand what may be in your corporation’s best interests. Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.