Can you smell that smell?

I'm standing downwind of the semiconductor industry, and the stench is overwhelming. Just when executives thought they were out of the woods and past the headaches of Sarbanes-Oxley compliance, there's another septic system leak, this time in the form of backdating options (see story, page 1).

The Wall Street Journal recently analyzed companies from many sectors and found highly suspicious patterns of stock gains among executives who receive options as part of their compensation package. It's not just happening in technology, of course, but options are the mother's milk of this business.

In most of the cases, the options had been backdated for executives. (We don't see a lot of evidence that engineers' shares got the same special treatment.)

Altera, Jabil Circuits, Vitesse, Brooks Automation and Power Integrations have all been jolted in recent weeks. Vitesse CEO Lou Tomasetta and two lieutenants, as well as PI chairman Howard Earhart and that company's CFO, have been thrown overboard. I spoke to John Daane, Altera's CEO, last week. He couldn't say much, because an investigation continues. But Daane had the guts to suspect issues within his company and to get an investigation under way.

Backdating is another self-inflicted wound that could hurt the industry's ability to do business and attract talent. Backdating of options isn't illegal, but SOX now makes it virtually impossible by mandating reporting of options grants within two days for a company's top senior management. And many companies have standard guidelines for when they date options (date of hire, date of promotions, first of the month).

The problem is that backdating options rewards lazy management. If a CEO can freely pick a date when the company's stock was at a particularly weak point, that's sandbagging. The executive has no incentive to drive the company harder to improve profits and drive the stock price. The executive wins with less-than-optimal results; the stockholders may or may not win. Who owns the company again? So the stench grows, and the announcements of internal investigations will spread. Stock options get another black eye, and companies will spend millions to restate earnings going back years.

The collective corner office takes its eyes off the business to deal with the distraction, and business growth stalls. Stock prices dive. The industry slumps.

That's my disaster scenario. For now, I'm hoping it doesn't happen, but I've got my gas mask ready.

By Brian Fuller (bfuller@cmp.com), publisher and editor in chief of EE Times