Valuing executive stock options: performance hurdles, early exercise and stochastic volatility

Philip Brown and Alex Szimayer

Accounting and Finance, 2008, vol. 48, issue 3, 363-389

Abstract: Accounting standards require companies to assess the fair value of any stock options granted to executives and employees. We develop a model for accurately valuing executive and employee stock options, focusing on performance hurdles, early exercise and uncertain volatility. We apply the model in two case studies and show that properly computed fair values can be significantly lower than traditional Black–Scholes values. We then explore the implications for pay‐for‐performance sensitivity and the design of effective share‐based incentive schemes. We find that performance hurdles can require a much greater fraction of total compensation to be a fixed salary, if pre‐existing incentive levels are to be maintained.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://doi.org/10.1111/j.1467-629X.2008.00259.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:acctfi:v:48:y:2008:i:3:p:363-389

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0810-5391

Access Statistics for this article

Accounting and Finance is currently edited by Robert Faff

More articles in Accounting and Finance from Accounting and Finance Association of Australia and New Zealand Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().