CHAPTER 11
Employee Equity Options and Compensation
Inrecentyears,manyfirmshaveshiftedtowardequity-based
compensationfor theiremployees. It isnot uncommon for
firms tograntmillions ofoptions annuallynot only totop
managersbut alsoto lower-levelemployees.Theseoptions
createapotentiallyvalue-decreasingoverhangovercommon
stockvalues.Whatusedtobeasimplepracticeofdividing
the estimated equity value by the number of shares
outstandingtoarriveatvaluepersharehasbecomeadaunting
exercise. Analysts struggle with how best to adjust the
numberofsharesoutstanding(andthevaluepershare)forthe
possibilitythattherewillbemoresharesoutstandinginthe
future.Theyattemptto capturethisdilutioneffectbyusing
the partially diluted or fully diluted number of shares
outstandinginthecompany.Aswewillseeinthischapter,
theseapproaches oftenyield misleadingestimatesof value
per share, and we proposea sounder way ofdealing with
employee options.
We also explore other forms of equity compensation,
includingtheuseofrestrictedandunrestrictedstockgrantsto
management, and the effects of such grants on value per
share. Likeoptions, thesestock grants reducethevalue of
equitytoexistingstockholdersandhavetobeconsideredin
valuation.
EQUITY-BASED COMPENSATION