Valuing Employee Stock Options; A Comparison of Alternative Models

©February 2003, 16 pages

Accounting for employee stock options has become a hot issue for financial executives once again. The International Accounting Standards Board has published for public comment proposals on how companies should account for share-based payment transactions (ED 2, Share-based Payment), and the Financial Accounting Standards Board is considering whether it should propose any changes to the U.S. accounting standards on stock-based compensation, in accordance with its objectives of promoting international convergence of accounting standards. This joint Financial Executives Research Foundation/Analysis Group Economics study will show why valuation is key to proper accounting for employee stock options (ESOs). It will compare and contrast six different valuation models that can be used to value ESOs, and will describe the differences between ESOs and publicly traded call options. The study also analyzes real data on actual ESO grants provided by FEI member companies, and compares their valuation under the different valuation models.