Title: ESOs for CFOs: Pricing Employee Stock Option Grants
Abstract: Employee stock options (ESOs) are used by many corporations as a major part of their compensation programs. Expensing issued ESOs on the grant date is now mandated in FAS 123 (R). The SEC’s specific measurement objective for disclosure is to estimate an ESO grant’s expense to the granting corporation on the grant date. A model to value an ESO grant can be based on simple adjustments to the Black-Scholes-Merton pricing equation or can entail pool- based methods with path-dependent ESO survival and risk-neutral pricing. As an alternative to models, a corporation can issue a special financial instrument to get a market-based estimate of an ESO grant’s expense. This requires careful instrument design, an efficient distribution mechanism, and an information disclosure scheme that allows potential buyers to make informed bids for the instrument. This paper explains how to estimate an ESO grant’s expense with both model-based and market-based techniques.
Publication Year: 2015
Publication Date: 2015-12-03
Language: en
Type: article
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