Brian Hall and Kevin Murphy, "Stock Options for Undiversified Executives," Journal of Accounting and Economics, 32, 2002, (p. 3).
We employ a certainty-equivalence framework to analyze the cost, value and pay/ performance sensitivity of non-tradable options held by undiversified, risk-averse executives. We derive "executive value" lines, the risk-adjusted analogues to Black-Scholes lines. We show that distinguishing between "executive value" and "company cost" provides insight into many issues regarding stock option practice including: executive views about Black Scholes values; tradeoffs between options, restricted stock and cash; exercise price policies; option repricings; early exercise policies and decisions; and the length of vesting periods. It also leads to reinterpretations of both cross-sectional facts and longitudinal trends in the level of executive compensation.
Useful Links
- Leverage the following resources to learn more about equity compensation and the ASC 718 and IFRS 2 standards.
- ASC 718 Standard
- IFRS 2 Standard
- Financial Accounting Standards Board (FASB)
- International Accounting Standards Board (IASB)
- Certified Equity Professional Institute
- National Center For Employee Ownership (NCEO)
- National Association for Stock Plan Professionals (NASPP)
- Financial Executives International (FEI)
Recommended Books
Advanced Topics in Equity Compensation Accounting
By Takis Makridis
In this required text for the CEP, published by the NCEO, author Takis Makridis selects a handful of valuation issues, one reporting issue and a hybrid of the above and subjects them to close scrutiny.
Click here to purchase a copy
