Employee Stock Option Compensation

Stock options have become a common part of the compensation of executives in many companies. Their use has created a significant amount of controversy among academics as well as among the general public.

Florian Cornelis Wolff addresses an aspect often overlooked in debate but crucial for assessment: How do executives themselves see their stock options? How do their personal expectations and risk preferences affect the value they assign to them? To answer these questions classical option valuation approaches need to be combined with recent findings from the field of behavioural finance. The result is quite surprising: It is because people behave irrationally that stock options may be worth their money.

Florian Wolff analyses how executives perceive their stock options and how their personal expectations and risk preferences affect the value they assign to them. He shows that stock options may be worth their money because people behave irrationally.

Autorentext
Dr. Florian Wolff promovierte bei Prof. Dr. Peter-J. Jost am Lehrstuhl für Organisationstheorie der Wissenschaftlichen Hochschule für Unternehmensführung (WHU) in Vallendar. Er ist Unternehmensberater bei McKinsey & Company, Inc. in München.

Inhalt
Tabel of contents.- 1. Introduction to the topic.- 1.1. Relevance of the topic.- 1.2. Questions posed.- 1.3. Summary conclusions.- 1.4. Outline of the structure of the book.- 2. Theoretical & empirical assessment.- 2.1. Definition of a stock option plan.- 2.2. Review of stock option plan use.- 2.3. Empirical analysis of the use of stock option plans.- 2.4. Conclusion.- 3. Review of risk-neutral valuation models.- 3.1. Importance of valuing stock options.- 3.2. Valuing stock options from the company perspective.- 3.3. Valuing stock options from the executive's perspective.- 3.4. Conclusion.- 4. Utility-based stock-option valuation.- 4.1. General introduction to expected utility models.- 4.2. Hall-Murphy model.- 4.3. Modifications to the 'traditional' EU model.- 4.4. Implications for a new model of subjective valuation.- 5. A new model to value executive stock option.- 5.1. Model specification and implementation.- 5.2. Model outputs.- 5.3. Summary of model findings and first hypotheses.- 6. Experimental test of subjective valuations.- 6.1. Purpose of the experiment.- 6.2. Experimental design.- 6.3. Experimental results.- 6.4. Implications for the valuation model.- 7. Conclusion and outlook.- 7.1. Summary conclusions.- 7.2. Future research agenda.- Appendix I.- Appendix I.