solutiontotheemployeeoptionvaluationproblembycreating
a“marketinstrument”thatwouldparallelemployeeoptions.
Buyersofthenewinstruments,calledemployeestockoption
reference (ESOR)securities would not be able to transfer
themandwouldhaveoptionsthatwouldvestoverfiveyears.
Both provisions are similar to those in employee stock
options. Cisco argued that the market prices for these
securities should be used to value employee options. In
September 2005, theSecurities and Exchange Commission
(SEC)rejectedtheCiscoproposal,arguingthatinvestorsin
companies would not value employee options atthe same
levelasemployeeswould.TheSECdidleavethedooropen
to a market-based solution at a future date.
How Much Does the Model Matter?
Are there significant differences in values when we use
alternativemodelstovalueemployeeoptions?Forthemost
part, the biggest single component determining employee
optionvalueisthelifeoftheoption.Usingthestatedlifeof
employeeoptionsintheBlack-Scholesmodelsyieldstoohigh
avaluefortheseoptions.Ifweuseanexpectedlifeforthe
option(whichtakesintoaccountearlyexercise andvesting
probabilities),thevaluesthatwearriveatarenotdissimilar
usingdifferentmodels.AmmannandSeiz(2003)showthat
the employee optionpricing modelsin use (the binomial,
Black-Scholes withadjusted life,and Hull-White)all yield
similar values.
23 Asaconsequence,theyargueweshouldsteerawayfrom
modelsthatrequiredifficult-to-estimateinputs(suchasrisk
aversion coefficients) and toward simpler models.
ILLUSTRATION 11.3: Option Value Approach