Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged) Objectives
This case has two educational objectives. First, it serves as an introductory case on option valuation in which students can use market data to place a dollar value on an option they are likely to encounter in their business careers. As such, the case encourages a discussion of the application of option pricing models, such as Black-Scholes, and exposes students to popular misconceptions of how options should be valued. Second, the case permits a discussion of the wisdom and efficacy of incentive stock compensation plans using options.
This case details a thinly disguised situation faced by a recent Harvard MBA graduate who was forced by a prospective employer to place a dollar value on a grant of stock options. In the case, the potential employee must choose between a cash bonus and a stock option grant. (In the actual case, the student's stock option grant was rescinded based on a change in corporate policy, and she was asked to suggest a fair cash value for the lost option grant.)
Suggested Assignment Questions
1. If we ignore tax considerations and assume that Sally Jameson is free to sell her options at any time after she joins Telstar, which compensation package is worth more? 2. How should we factor in the complications ignored in the above question? How would they affect the value of the option to Ms. Jameson? What should Ms. Jameson do? Why?
________________________________________________________________________________________________________________ This note was prepared by Professor Peter Tufano for the sole purpose of aiding classroom instructors in the use of Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged), HBS No. 202-117. It provides analysis and questions that are intended to present alternative approaches to deepening students’ comprehension of business issues and energizing classroom discussion. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
This document is authorized for use only by weu sun until September 2011. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.
rP os t
FEBRUARY 11, 2004
Teaching Note—Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged)
3. Does granting stock options cost companies anything? If so, who pays? What incentives do executive stock option plans create for their recipients? How might firms create more effective or more efficient incentives?
4. What if Ms. Jameson decided that the option was a better deal, but that she didn't want all of her financial wealth (as well as her human capital) tied to the fortunes of Telstar? Assuming she works at Telstar and accepts the option grant, is there anything she can do to "untie" some of her wealth from Telstar?
Case Issues and Teaching Plan
The case discussion can be divided into three parts, each emphasizing a different set of issues: (1) an application of simple option pricing, (2) consideration of complications and Ms. Jameson's decision, and (3) a general discussion of the use of stock options in compensation packages. (1) Option pricing without complications (25 minutes) While the...