In two short decades, stock options have gone from being the solution to the problem.

During the 1980s, investor advocates became deeply concerned about underperforming and overpaid corporate leadership. Economists and compensation experts argued that larding executives with stock options would fix things. The seductive idea was to align the interests of people who run public companies more tightly with the interests of the owners of those companies.

Two business-school professors explained in a 1984 New York Times column that "the increased number of chief executives with multimillion-dollar total compensation is due to the growing use of stock options," which they called "a desirable change because such plans link compensation more closely to shareholder wealth and motivate managers to look beyond next quarter's results."

It's easy to see why options looked like such a good solution. In most plans, stock options give executives (and other employees) the right to buy shares later at the price of the stock on the date of the grant. If shares rise from the grant price -- something investors in the company want -- the executive profits by exercising the option and selling the shares.

In the intervening years, stock options succumbed to the unbreakable law of unintended consequences. The options-backdating scandal, where company executives received grants at remarkably low prices, thereby maximizing profit potential, is only the latest example. But it may turn out to be the most potent in discrediting large options grants to executives.

Unlike the debate over options expensing, backdating is as easy to understand as corporate looting. President Bush said that backdating was bad for America.

"We've woken up from the options party to see that the devil is in the details and that options were a much more imperfect instrument than people believed," says Harvard law professor Lucian Bebchuk, an expert on executive compensation and a critic of the high levels of executive pay.

Federal authorities are investigating the backdating issue. More than 20 companies have been subpoenaed or are under Securities and Exchange Commission scrutiny. While backdating has merited attention, options have had other pernicious effects on corporate income statements and executive behavior.

For one, because employee stock options weren't counted as a compensation expense until only recently, stock options distorted financial results. Companies, especially those in Silicon Valley, looked more profitable than they really were. The lack of expensing encouraged many boards of directors to view options essentially as free money. Often in the 1990s, when a company's share price tanked, boards would reprice options to lower strike prices. They argued that, if they didn't, the companies would lose "the great people who had the share-price collapse on their watch," says Henry Hu, a law professor at the University of Texas at Austin.

Beyond muddying income statements, options had a more subtle and dangerous effect on executive behavior. Because of their lottery-like, all-or-nothing reward mechanism, options pushed management toward short-term, trend-following decisions and away from unpopular moves that could be lucrative in the long run.

A number of Wall Street analysts are playing down the options-backdating scandal. This comes as little surprise. They have been ignoring options as a shareholder issue for years. Even though new accounting rules require companies to run options expense through their income statements, many analysts -- following the lead of the corporations they cover -- exclude the cost from their earnings estimates. According to Thomson Financial, which tracks earnings estimates, one-fifth of the consensus estimates for companies in the Standard & Poor's 500-stock index exclude such expenses.

Nevertheless, companies are getting the message: Stock-options issuance is in decline. Last year, option grants dropped 17 percent for the S&P 500, compared with the year earlier, says Jack Ciesielski, editor of the Analyst's Accounting Observer.

But stock options can still play the role advocates once hoped. And that's important, since it's undesirable to replace stock options wholesale with other forms of compensation that have a certain value even if the executives don't perform, such as cash and restricted stock.

Some options overhauls have already taken place. Given the revelations about backdating, it turns out that one of the best elements of the much-derided Sarbanes-Oxley law was to require prompt disclosure of options grants and exercises, as well as other executive sales and purchases. The potential for backdating has been vastly reduced.

There are other modifications that would make stock options more effective. Boards should consider restricting access to exercised options over a substantial period of time to encourage longer-term thinking. There should be "claw-back" mechanisms to require that executives give back options -- or cash from their sale -- if earnings restatements or major earnings shortfalls emerge. The gain from the exercising of stock options could be adjusted to reflect a company's outperformance compared with its peers.

Some investors always looked at how many options a company granted. The more options, the lower the earnings per share would be (all other things being equal). But as the stock prices of the companies involved in the backdating-scandal tumble, investors are realizing that widespread abuse of options grants were more than about earnings.

They told you about character.