Wayne, this won't solve the diamond executive comp. problem, but you may find it interesting. This is an article (Feb. 1994, by an organization call fed.org ... having no connection to fed.gov, just a tricky namesake):
fed.org
They make the bullish case that the Black-Scholes model prices the expense for an employee stock option too high:
The underlying
assumptions of the Black Scholes pricing model are
re-examined. This paper determines that part of the
option value derives from the award of equity (an
equivalent stock bonus) while another part of the Black
Scholes option value derives from the increase in stock
value (equity appreciation). The analysis suggests a new
valuation called the Equivalent Stock Bonus (ESB) option
price that would maintain the proper expensing of an
equity award, yet avoid expensing value derived from
equity appreciation. It is further shown that the ESB
price may be the true cost of an employee option to the
company. This implies that the ESB may also be the fair
value of the non tradable employee option.
There's some heavy math in there, but the basic premise is that for a very volatile stock, the expected price appreciation is zero (most companies go out of business, blah, blah, blah), so the expected price appreciation must be zero. Its all done with mirrors. <g> |
