<abstract xmlns="http://www.w3.org/1999/xhtml">Employee stock options (ESOs) are an instrument in compensating top management of corporations. In the literature, they are described as a variable component of remuneration of a long-term character (<xref ref-type="bibr" rid="j_foli-2016-0010_ref_002_w2aab2b8c17b1b7b1ab1ab2Aa">Borkowska, 2012</xref>). There are six characteristic elements of the ESO: a grant date, the ESO plan duration, employees entitled to receive options, vesting criteria, a vesting period, and an exercise price. The article refers to the exercise price. The remuneration of employees is determined by the option’s intrinsic value, i.e. the difference between the current stock price and the exercise price. This difference affects the costs incurred by a company in relation with their incentive stock option plan. In this connection, the exercise price of stock options needs to be analysed.The literature shows that usually the strike price is equal to the stock market’s value at the time the option is granted. The options issued with an exercise price equal to the market value of the company’s stock on the date of the grant usually lead to at-the-money options. <xref ref-type="bibr" rid="j_foli-2016-0010_ref_015_w2aab2b8c17b1b7b1ab1ac15Aa">Walker (2009)</xref> mentions that almost all options issued by US firms have been such type of options. Hence, the options with exercise prices less than the prices of the underlying assets have been rarely observed. One of the solutions can be discounting the exercise price by using sectoral indexes, which are sensitive to changes on a particular market.The purpose of this paper is to address several aspects of specifying the exercise price in ESOs. The research shows how sector indexes can be used to discount it. Using sectoral indexes in determining the exercise price can partly limit the unreasonably high profits from the ESO. The literature does not provide ready-made formulas of exercise prices based on specific variables. The aim of the research is to present and apply the formula of the exercise prices in which sectoral indices are used to discount.The data are from the Warsaw Stock Exchange (WSE) and include those companies that revealed the information concerning their incentive programs in 1999–2013. The relevant data come from annual reports, current reports, supervisory boards’ resolutions, and press announcements.</abstract>

Employee stock options (ESOs) are an instrument in compensating top management of corporations. In the literature, they are described as a variable component of remuneration of a long-term character (Borkowska, 2012). There are six characteristic elements of the ESO: a grant date, the ESO plan duration, employees entitled to receive options, vesting criteria, a vesting period, and an exercise price. The article refers to the exercise price. The remuneration of employees is determined by the option’s intrinsic value, i.e. the difference between the current stock price and the exercise price. This difference affects the costs incurred by a company in relation with their incentive stock option plan. In this connection, the exercise price of stock options needs to be analysed.The literature shows that usually the strike price is equal to the stock market’s value at the time the option is granted. The options issued with an exercise price equal to the market value of the company’s stock on the date of the grant usually lead to at-the-money options. Walker (2009) mentions that almost all options issued by US firms have been such type of options. Hence, the options with exercise prices less than the prices of the underlying assets have been rarely observed. One of the solutions can be discounting the exercise price by using sectoral indexes, which are sensitive to changes on a particular market.The purpose of this paper is to address several aspects of specifying the exercise price in ESOs. The research shows how sector indexes can be used to discount it. Using sectoral indexes in determining the exercise price can partly limit the unreasonably high profits from the ESO. The literature does not provide ready-made formulas of exercise prices based on specific variables. The aim of the research is to present and apply the formula of the exercise prices in which sectoral indices are used to discount.The data are from the Warsaw Stock Exchange (WSE) and include those companies that revealed the information concerning their incentive programs in 1999–2013. The relevant data come from annual reports, current reports, supervisory boards’ resolutions, and press announcements.

Using Sectoral Indexes to Discount the Exercise Price of Employee Stock Options

University of Szczecin, Faculty of Economics and Management, Institute of Finance, Mickiewicza 64, 71-101 Szczecin,

Folia Oeconomica Stetinensia

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Using Sectoral Indexes to Discount the Exercise Price of Employee Stock Options"}

Employee stock options (ESOs) are an instrument in compensating top management of corporations. In the literature, they are described as a variable component...

Using Sectoral Indexes to Discount the Exercise Price of Employee Stock Options

Publicado en línea: 30 dic 2016

Páginas: 174 - 185

Recibido: 24 sept 2015

Aceptado: 22 jun 2016

DOI: https://doi.org/10.1515/foli-2016-0010

Palabras clave
employee stock options, exercise price, equity compensation instruments

© 2016 University of Szczecin

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Using Sectoral Indexes to Discount the Exercise Price of Employee Stock Options

Publicado en línea: 30 dic 2016

Páginas: 174 - 185

Recibido: 24 sept 2015

Aceptado: 22 jun 2016

DOI: https://doi.org/10.1515/foli-2016-0010

Palabras claveemployee stock options, exercise price, equity compensation instruments

© 2016 University of Szczecin

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Palabras clave
employee stock options, exercise price, equity compensation instruments