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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.

JEL Codes

J33, M12, M13, M52

Keywords

Stock Options, Compensation, Incentives

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