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    Sally Jameson

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    Duc
    The document discusses Sally Jameson's compensation package from her employer which includes both stock options and cash compensation. It values the stock option package at $13,902 based on the Black-Scholes and binomial pricing models, assuming 3000 options with a $35 exercise price and other input values. It values the cash compensation of $5000 at $6,697 if invested for 5 years at a 6.02% interest rate. While the stock options are worth more, they also carry liquidity and early exercise risks. The document also discusses how stock options represent a non-cash operating expense for companies and can serve as an effective incentive for employees by linking their compensation to company performance. Individualizing stock option packages based on employee

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    Sally Jameson

    Uploaded by

    Duc
    470 views2 pages
    The document discusses Sally Jameson's compensation package from her employer which includes both stock options and cash compensation. It values the stock option package at $13,902 based on the Black-Scholes and binomial pricing models, assuming 3000 options with a $35 exercise price and other input values. It values the cash compensation of $5000 at $6,697 if invested for 5 years at a 6.02% interest rate. While the stock options are worth more, they also carry liquidity and early exercise risks. The document also discusses how stock options represent a non-cash operating expense for companies and can serve as an effective incentive for employees by linking their compensation to company performance. Individualizing stock option packages based on employee

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    The document discusses Sally Jameson's compensation package from her employer which includes both stock options and cash compensation. It values the stock option package at $13,902 based on the Black-Scholes and binomial pricing models, assuming 3000 options with a $35 exercise price and other input values. It values the cash compensation of $5000 at $6,697 if invested for 5 years at a 6.02% interest rate. While the stock options are worth more, they also carry liquidity and early exercise risks. The document also discusses how stock options represent a non-cash operating expense for companies and can serve as an effective incentive for employees by linking their compensation to company performance. Individualizing stock option packages based on employee

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    470 views2 pages

    Sally Jameson

    Uploaded by

    Duc
    The document discusses Sally Jameson's compensation package from her employer which includes both stock options and cash compensation. It values the stock option package at $13,902 based on the Black-Scholes and binomial pricing models, assuming 3000 options with a $35 exercise price and other input values. It values the cash compensation of $5000 at $6,697 if invested for 5 years at a 6.02% interest rate. While the stock options are worth more, they also carry liquidity and early exercise risks. The document also discusses how stock options represent a non-cash operating expense for companies and can serve as an effective incentive for employees by linking their compensation to company performance. Individualizing stock option packages based on employee

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Duc Nguyen

    AF 495, Financial Policy


    Professor: Lal, Chugh

    Sally Jameson
    A. Value of each individual compensation package
    Stock Option Compensation
    In order to forecast the value of the stock option package, determining the call price is
    initially. There are two approaches to calculate the call price for each option, blackscholes and binominal pricing. In addition, the current stock price, exercise price, time of
    option, annualized interest rate, and the riskiness of the stock are the inputs for either
    approach. In the market, the current price is $18.75. It is much lower than the 5 year-offer
    exercise price for each option which is $35. Besides, the risk free rate is 6.02% for the 5year Treasury bill (Exhibit 4). As well, the stock volatility would be approximately 40%.
    This assumption is based on historical average of 4 years from 1989-1992. As a result,
    the forecast call prices would be $4.6304 and $4.5929, binominal and stock-scholes
    pricing model respectively. Therefore, with the offer of 3000 European options, the total
    value of the package would make up to 3000 * $4.6304 = $13,902.13.
    Cash Compensation
    The cash compensation offers Sally with the amount of $5000. With the assumption that
    there is no tax on the money, the investment of $5000 on 5-year Treasury bill at rate of
    6.02% would yield the amount of $6,697.44 compounding.
    Nevertheless, the stock option compensation is worth more than the cash compensation
    as the total value of $13,902 to $6.697.44. However, the companys stock option
    possesses some major issues which more or less could affect Sallys decision such as the
    liquidity and early exercise.

    B. Stock Option Cost


    Granting stock option is the companys policy to compensate employees. It implies that
    the company would deduct the employees cash compensation in replacement for options.
    This can be considered as the employee stock options, in which the company is option
    writer and employees are option holders. In other words, employees pay for options value
    by receiving less cash compensation by an amount equivalent to options value. As the
    cost of stock option is based on its value, companies do not pay for these values directly.
    In term of accounting cost, this would be regarded as non-cash operating expenses.

    C. Incentives
    The stock option plans can create the appropriate incentives to either corporations or
    employees. For the recipients, it can be regarded to tax reduction. By avoiding the
    income tax payments, stock option would help the employees with high annualized
    income salaries by converting part of income to capital gains. Furthermore, stock options
    are effective way to correlate performance and compensation. In the other words, it
    implies that compensation would boost the individual performance as well the overall

    performance of the firm. For the employees in high positions, the compensation would
    encourage them to act in the best interest of company to foster company growths as well
    as increase the stock prices. Employees, talented and excellent, are the main purposes of
    creating incentive plans by the company. Generally, the stock option only benefits the
    executives with high income salaries and in the decision-making positions, where have
    ability to impact on the companys profitability and growth. Therefore, in order to make
    the stock option plans are more favorable, the company should individualize the package
    based on different positions. Further, granting the privileges of early exercise or lessen
    the period of stock options would also motivate the employees to take the plans. These
    set up of granting stock option plans would also help to encourage the performances of
    employees to lead to both the short and long term success of the firm.

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