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.
J33, M12, M13, M52
Stock Options, Compensation, Incentives
Rhee, Thomas A.
"On Valuing Employee Stock Option Plans with the Requisite Service Period Requirement,"
Journal of Entrepreneurial Finance and Business Ventures:
1, pp. 39-50.
Available at: http://digitalcommons.pepperdine.edu/jef/vol11/iss1/5