Picture a race track where a few privileged bettors know the results of the contest in advance and place their bets on the winning horse. This is what can happen when companies back-date stock-option grants to inflate an executive's pay, possibly in violation of securities and tax laws. The executives get a windfall on their sure bet at the expense of shareholders.

This potential stock-option shenanigan is the focus of investigations by the Security and Exchange Commission and several U.S. attorneys at more than 20 publicly held companies. It isn't known if any, some or all of the firms actually manipulated stock options, but any that are found to have cheated should be punished. The scandal should be a wake-up call for corporate managers to ensure that their own houses are clean. Boards of directors, too, should tighten their oversight.

The investigations were prompted by academic studies and reports in the Wall Street Journal that detailed patterns in stock-option grants suggestive of possible back-dating. Those analyses described highly improbable option-granting patterns at some companies.

A stock option gives the executive the right to buy company stock at a set price — usually the price of the stock on the date that the stock option is awarded. The higher the stock price rises over time, the more the executive profits by selling the option. Ideally, stock options motivate executives to improve the company's performance and, thus, its stock price over time. In doing so, the options increase the profit executives get when they sell.

Another way to increase the profits is to back-date the option to get a lower price. Doing so after the stock price has risen ensures that the executive will get a richer payout. The Journal showed that one company awarded six options grants to an executive on low stock-price dates in six years. The odds of this happening by chance is estimated at one in 300 billion. By comparison, an individual would have better odds of winning the Powerball lottery, where the chance of winning is one in 142 million.

Back-dating options itself is not illegal, but failure to disclose and account for it properly can be. There also can be tax consequences. Beyond that, back-dating options without disclosure breaches investor trust.

The SEC, meanwhile, is in the midst of the biggest revision ever of executive pay rules. One expected rule — nicknamed the "holy cow sheet" because of the potential amounts involved — would require firms to sum up the total compensation for its top five executives. That should better focus investors and boards on real pay for performance. Meanwhile, companies that issue stock options should heed the lessons of Enron and other companies that have run afoul of the rules by making sure their operations are above reproach.