Loading springs and dodging bullets

Two terms, “spring-loading” and “bullet-dodging” have reminded me of the tendency in business to put a positive spin on negative practices.

Spring-loading refers to the practice of granting options immediately before releasing good news that will likely increase the stock price, resulting in options that are not in the money technically when granted, but are, shortly thereafter.

Bullet-dodging refers to the practice of granting options immediately after releasing bad news that will likely decrease the stock price, resulting in options that avoid being further out of the money had they been granted before the news.

These practices are shady, dishonest, and similar to insider trading in that they take advantage of the difference in information that company insiders have compared to outsiders.

The use of options to motivate management and align their interests with that of shareholders is still relatively new, but it’s increasingly subject to manipulation that is unfair to ordinary investors.

Along with the ongoing SEC investigations into backdating of options, future investigations into spring-loading and bullet-dodging could turn up more violations of ethics in business.

The attractiveness of options continues to decline with every instance of abuse. As Jack Ciesielski points out:

What made them attractive in the first place was that they were “money for nothing” with little visibility into their disbursement.

Now that options are getting the publicity they deserve, and none of it positive, their use will stay in the spotlight until ethical use becomes the norm.

What do you think about the use of options as compensation? Is spring-loading and bullet-dodging really wrong, or am I up in arms about nothing?