exercise price
A news story reported that the former CEO of homebuilder KB Home was convicted “of four felony counts in a stock option backdating scam.” The article goes on to note: A stock option allows an employee to purchase a company’s stock at a preset price at a future date. [The KB Home CEO] retroactively tied the exercise price of his options to dates when the stock was selling for a low price. . . . a. Why would a company use stock options as part of a top manager’s compensation?
b. What is the “exercise price” in an options contract? Why would this manager have wanted his options backdated?
c. From the point of view of investors in KB Home, which information problem is involved here?
exercise price