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As a result, regulations in the Sarbanes-Oxley Act require companies to report option grants to the Securities and Exchange Commission within two business days.In addition to being illegal, backdating isn't always a sure thing.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.Stock prices change, however, and there is no guarantee that any stock price will ever be above the exercise price.

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.

If, however, Company XYZ decides to backdate the options, it could change the paperwork to state that it actually granted those stock options to John on, say, June 15, 2008, when the stock was only trading at per share.

This would mean that John's 2012 stock option grant would have an exercise price of per share instead of per share.

For example, let's assume that John Doe is the CEO of Company XYZ.

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.

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