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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (68576)	10/3/1999 10:40:00 PM
From: umbro	Read Replies (2) \| Respond to of 132070

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>