Valuation of Employee Stock Options

Abstract: In the last twenty years, stock options have become an important device for firms to compensate and incentivize their employees. Motivated by recent recommendations by both European and American accounting standards boards that these options be expensed in firms’ statements, we provide an analytical and flexible framework for their evaluation. Instead of looking at single options in isolation, we consider the flow of options an employee can expect to receive throughout his/her employment. This includes features such as vesting, possibility of reset if the firm’s stock value diminishes, suboptimal exercise, reload potential and trading and hedging restrictions on the employee.

Joint work with Wei Xiong.