Here's an interesting article from CFO magazine titled "Making a Market For Stock Options" on Cisco Systems' proposal to use market processes to value employee stock options. It was likely sparked by the Financial Accounting Standards Board's revised Statement 123R, which will require the expensing of employess stock option grants.
For the uninitiated (and I had to check with a friend that works in this area myself to be sure), employee stock option (ESO) grants differ from "standard" options in a number of ways - they're typically issued at the money, have up to a 10-year term to expiration, and can't be exercised for a time generally in the neighborhood of three years. In addition, they're non-tradable, unlike standard options.
These factors (particularly the non-tradability festure) result in the employee's portfolios being overweighted in the ESO. So, to diversify, employees often exercise ESOs early (which wouldn't be optimal with a standard option). As a result, it's likely that ESOs are considerably less valualble than their "standard" counterparts. If you want to see some academic work on these valuation differences between ESOs and publicly traded options, see "Early Exercise and the Valueation of Employee Stock Options" by Kulatilaka and Marcus (abstract available on the SSRN) or "The Cost of Employee Stock Options" by Bettis, Bizjak and Lemmon (also available on SSRN).
Cisco's move is most likely motivated by hopes that the market will assign lower values to the options than would models such as Black-Scholes. Based on some of the festures of ESOs, it's likely to be the case. However, since Cisco's new proposed securities will be tradable, they probably won't be exercised early to the same extent that the ESOs are.