Since at-the-money options require a firm's share price to appreciate in order for the executives to profit, they meet the criteria for performance based-compensation and therefore qualify as a tax deduction.When senior executives realized that they could look backwards for the date during which their firm's stock was at its lowest trading price and then pretend that was the date they were issued the stock grants, a scandal was born.
The SEC reported that investors suffered in excess of $10 billion in losses due to share price declines and stolen compensation.
Why It Matters Betting on stock prices when you already know the answer is dishonest.
The amendment labeled executive compensation in excess of $1 million as unreasonable, and thus not eligible to be taken as a deduction on the firm's taxes.
Performance-based compensation, on the other hand, was deductible.
The roots of the scandal date back to 1972, when an accounting rule was put in place permitting companies to avoid recording executive compensation as an expense on their income statements so long as the income was in the form of stock options that were granted at a rate equal to the market price on the day of the grant, often referred to as an at-the-money grant.