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On Valuing Employee Stock Option Plans with the Requisite Service Period Requirement

Author

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  • Thomas A. Rhee

    (California State University, Long Beach)

Abstract

This paper examines issues involving employee stock option plans as a part of employee compensation. In particular, employee stock options requiring a requisite service period are viewed as an option on options and hence, a compound option, as the employee’s future market wage rate is unknown. Non-transferability of employee stock options is overcome by the well-known put-call parity theorem. Difficulties arise, however, if a firm is privately held. The paper derives a simple formula to value equities for privately held firms.

Suggested Citation

  • Thomas A. Rhee, 2006. "On Valuing Employee Stock Option Plans with the Requisite Service Period Requirement," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 11(1), pages 39-50, Spring.
    • Handle: RePEc:pep:journl:v:11:y:2006:i:1:p:39-50
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    More about this item

    Keywords

    Stock Options; Compensation; Incentives;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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