Hands-Off Options

Executive compensation long has attracted considerable interest from investors, academics, regulators, and the media. It received increased attention in the wake of the Enron and other corporate governance scandals that erupted at the beginning of the century. Hundreds of firms were found to have engaged in various forms of earnings manipulation that, ultimately, destroyed tens of billions of dollars of social value. Much of this earnings manipulation was linked to executives' pay arrangements, such as their ability to time the unwinding of their equity incentives.

The scandals eventually led to some of the most important corporate governance reforms in decades, most notably the Sarbanes- Oxley Act ("SOX"). These reforms were intended to improve corporate governance, including executive pay arrangements. In fact, SOX and accompanying reforms appear to have had some positive effects on compensation practices. For example, SOX's disclosure requirements seem to have reduced substantially the amount of option grant backdating.