It's been close to 20 years since I studied Black-Scholes, but the one thing I remember about it is that a key assumption is that there be a liquid market for the option.
This has never been the case for employee stock options. BS is meant for freely tradable options. It is applied to ISO's only because GAAP says that's how you do it, not because Black or Scholes ever thought it made sense. The bean counters said "we have to count them somehow" and BS was the only way they could find, I guess.
I have seen a lot of cases where the BS value was far less than the value imputed by the optionee. This can occur because the optionee often has inside information about the company (or at least thinks he/she does). Options grants tend to be largest when there is a perception that the stock price is going to rise. Whether these perceptions are right or not is beside the issue; the optionee values the receipt of the options based on those perceptions, and that's one of the best measure of the value that I can come up with.
Obviously there's no "right" way to value ISO's and NSOs objectively. I'd much rather have them laid out in a table in the 10Ks and 10Qs, quarter by quarter -- grantee (at least for officers, directors, and non-employees--a lump sum for everyone else), grant date, strike price, stock price on grant date, expiration date. I'd also require an 8-K whenever an option grant is made that is greater than a certain percentage of the outstanding stock, probably around 1%.
I've constructed this information many times from K's, Q's, and proxy statements, and you would be amazed at how often companies conveniently "forget" to tell you about the options they granted. It's exceedingly difficult to get a good picture of just how much of the store they are giving away to get the services of key employees. This is particularly true of companies who post negative net income, where nobody ever looks at the fully diluted share count because it isn't used in the EPS calculation.
I could care less whether they have to expense a fair market value, because whatever number they come up is ultimately arbitrary. I care a lot that option compensation be clearly disclosed, so that any investor can decide for him or herself whether it's justified.
Just my two cents. |
