disproportionaterewardsforanyeffortsthattheywereputting
in,withoptionspackagesvaluedintensofmillionsofdollars.
The second was the belated acceptance by accounting
standardsboardsthatemployeeoptionsarecompensationand
thattheyshouldbe valuedandexpensedatthetimeofthe
grant (and not at exercise).
Questionshavecomewiththisawareness:Howdowevalue
employee options? How do they affect the intrinsic
(discountedcashflow)valueofafirm?Howcanwecompare
multiplesofearningsorbookvalueacross companieswith
widelydivergentpoliciesontheuseofemployeeoptions?In
thischapter,wehavedevelopedanswerstotheseandother
questions.Inparticular,employeeoptiongrantsaffectvalue
persharebecausetheyaffectcurrentandfutureearningsand
alsobecausetheyhavethepotentialforalteringthenumberof
shares outstanding.
Inthefinalpartofthechapter,welookedatthereemergence
ofrestrictedstockandhowbesttodealwithitsuseinvaluing
acompany.Restrictedstockshouldgenerallybevaluedlower
thanother stock because of its illiquidity. Like options, it
affects value per share.
1 M.C.Jensen andW. H.Meckling,“Theory oftheFirm:
Managerial Behavior, Agency Costs and Ownership
Structure,” Journal of Financial Economics 3 (1976):
305–360.
2 An additional advantage of using equity options to
compensate employees is that their value is likely to be
highest when the sector is doing well and alternative job
opportunities aregreatest for employees. Thus,the cost of