Define backdating options
The general reason companies backdate options is to create a lower exercise price, which in turn increases the probability that exercising the options will make more money for the optionee.
He pays the $15 per share exercise price and can turn around and sell those shares on the exchange for $50 each, netting a profit of $35 per share, or $35,000.Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.In our example, backdating the options is the same as giving John Doe a check for $35,000 -- without recording that $35,000 on the within two business days.In addition to being illegal, backdating isn't always a sure thing.The board formally grants the stock options to John every year at its January board meeting.Typically, the grant date of the stock options is the same as the date of the board meeting.
This is important to note, because the grant date is what determines the exercise price on the options.
For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at $45 per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only $15 per share.
Setting the date of an employee stock option to an earlier time than when the option was actually granted. Backdating the option is not illegal, but the improper disclosure of the activity to the Securities and Exchange Commission is considered illegal.
grants to one that is earlier than the actual grant date in order to place a lower exercise price on the options and thus enhance the potential profits from the exercise of those stock options.
The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results). When he was hired, the Company XYZ board of directors offered John an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.
Those options give John the right but not the on the date of the grant.