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Valuing reload options

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  • Jonathan Ingersoll

Abstract

Over the past quarter century, the use of stock options as pay for performance has grown enormously. Option grants now account for 32% of CEO pay—more than twice that of salaries. In addition options are now being granted to many more employees than before. During this same time period, there have been numerous innovations in the features on compensation options. One of these features is the reload—the grant of new options to replace shares tendered in the payment of the exercise. Within the past year, the long-delayed FASB requirement that options be expensed for financial reporting has finally become a fact. It is incumbent upon financial researchers to provide methods to achieve the goal of valuing options, not only to serve the accounting needs, but also to provide ways of determining their true costs and incentive effects. This paper analyzes the various forms of reload options and provides simple Black-Scholes like formulas for evaluating them. Copyright Springer Science+Business Media, LLC 2006

Suggested Citation

  • Jonathan Ingersoll, 2006. "Valuing reload options," Review of Derivatives Research, Springer, vol. 9(1), pages 67-105, January.
    • Handle: RePEc:kap:revdev:v:9:y:2006:i:1:p:67-105
    DOI: 10.1007/s11147-006-9005-z
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    References listed on IDEAS

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    1. Hemmer, T & Matsunaga, S & Shevlin, T, 1998. "Optimal exercise and the cost of granting employee stock options with a reload provision," Journal of Accounting Research, Wiley Blackwell, vol. 36(2), pages 231-255.
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    5. Philip H. Dybvig & Mark Loewenstein, 2003. "Employee Reload Options: Pricing, Hedging, and Optimal Exercise," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 145-171.
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