probabilityofvesting,multiplyingthisprobabilityby
theoptionvaluewillyieldanexpectedvalueforthe
option.Whilepuristswouldstillresist,themodelhasprovedtobe
remarkably resilient even in environments where its basic
assumptions are violated.
TherearenumerousvariantsoftheBlack-Scholesmodelthat
havebeendeveloped for employeeoptions. Twoexamples
are listed here:
1.TheFASB model.While theFASB doesnot proposea
specific model, it recommends that employee options be
valuedassumingaforfeiturerateforemployees(basedonthe
firm’shistory)andusingashorterlifethanthestatedmaturity
(allowingfortheearlyexercise).Tomakebothestimates,the
FASB recommends using historical data.
- The Bulow-Shoven model. The Bulow-Shoven model
startsoffwiththepremisethatlong-term employeeoptions
arenotlong-termatall.Themodelproposesatechniquethat
beginsbytreatingallemployeestockoptionsasiftheyhavea
90-day life, in estimating an initial value using a
Black-Scholes model. However, as employees continue
workingforthefirmdaytoday,quartertoquarter,theyare
granted90-dayextensionsonthetermoftheiroptions,and
theseextensionsarevaluedasoptionsandtreatedasexpenses
in subsequent periods.
21
Thesevariationsyieldlowervaluesforemployeeoptionsthan
using the unadjusted Black-Scholes model.