When Is Backdating [stock options] a Crime? (CFO.com)

"The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised. The practice involves using hindsight to assign a stock-option contract an earlier date than its actual grant date. By pushing the date into the past, to a time when the underlying stock traded at a lower price than it did the day the grant was issued, the option holder is, in effect, being given the promise of cash. That promise is considered to be an in-the-money options grant.

In-the-money options are different from performance-based compensation in the eyes of the Internal Revenue Service and the Financial Accounting Standards Board. For example, the IRS disallows certain corporate tax deductions for in-the-money options, but it allows them for performance-based pay."