The practice is illegal if it is not followed by proper disclosure and related expenses are not recorded in financial statements.
This is the granted option that would be reported to the SEC.
To the extent the employer's position can be modeled as a type of option, it is most often modeled as a "short position in a call." From the employee's point of view, the compensation contract provides a conditional right to buy the equity of the employer and when modeled as an option, the employee's perspective is that of a "long position in a call option." Employee Stock Options are non standard contracts with the employer whereby the employer has the liability of delivering a certain number of shares of the employer stock, when and if the employee stock options are exercised by the employee.
Traditional employee stock options have structural problems, in that when exercised followed by an immediate sale of stock, the alignment between employee/shareholders is eliminated.
Erik Lie is a Norwegian finance professor at the University of Iowa who published a report about options backdating that led to many investigations by the SEC into the potentially illegal practice.
He was the subject of profile in Business Week for his contribution to uncovering options backdating scandals.