Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged)
Group Satie: Ai Nakajima, Chen-Wei Tang, Mithun Sridharan, Sarah Wright, Daniel de la Cuesta
23th May 2012
If we ignore tax considerations and assume that Sally Jameson is free to sell her options at any time after she joins Telstar, which compensation package is worth more?
We can calculate the value of the stock options today using the Black-Scholes Model. If the value of the 3000 Sally´s stock options is greater than $5000 and she has the possibility to sell the options, then she should go for the stock options instead of the cash.
To calculate the value of the stock options today we have to find the ...view middle of the document...
If we look at Exhibit 2, the Telstar long-term Call Options traded have a maturity of 2 years and a maximum strike price of $20.00. Given the trading trend observed, we think that she is not going to be able to sell her stock options in the market. Hence, she should select the cash as compensation package.
How should we factor in the complications ignored in the above question? How would they affect the value of the option to Ms. Jameson? What should Ms. Jameson do? Why?
Now we are assuming Sally can´t sell the options until 5 years. Also, if she leaves the company before 5 years she will lose the options.
In addition, the capital gains of the stock options in 5 years (if we can sell them) have to be higher than $6754.49. This money is the return that you get if you invest the money ($5000) in zero-coupon US Treasury Yields at 6.20%.
(Sp * 3000) – (35 * 3000) = 6754
Sp = $37.25
The price of the stock in five years should be $37.25 to make the stock options a better compensation package than cash.
Looking at the historical data provided in the Excel spreadsheet, the stock price was above $35 only once in the last ten years (10/9/1989) and never has been above $37.25. So, it is very unlikely that the stock price will be above this number.
Sally should go for the cash as a compensation package instead of the stock options. On the other hand, Sally could be very confident of her possibilities as a manager and if she thinks that can increase the value of the company to $37.25 per share she should go for the stock options.
Does granting stock options cost companies anything? If so, who pays? What incentives do executive stock option plans create for their recipients? How might firms create...