Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged)
Sally Jameson, a second-year MBA student at Harvard Business School, was thrilled but confused. It was late May 1992, graduation was approaching, and she had finally landed the job of her choice. She had just finished an early morning telephone conversation with Bob Marks, the MBA recruiting coordinator at Telstar Communications, a large, publicly held multinational company. Mr. Mark had offered Ms. Jameson a unique position in operations at Telstar, and from the description, it sounded exactly like the job that she wanted Since her first interview with Telstar, she had been very impressed with the company and its people while Ms. Jameson was certain that she would accept the job, there was still one unsettled, yes crucial, matter---her compensation.
During the conversation with Marks, Jameson had asked what her compensation package would be Marks: “Well, Sally, we are all very impressed with you and would like to offer you a starting salary of 50,000. In addition, you will also, receive a signing bonus” Jameson: “that has salary is a little below what I had expected. Is that negotiable?” Marks: “I’m afraid not. That’s the same starting package all MBAs get However, you will receive a bonus upon accepting our offer. You can receive $5,000 in cash, or choose stock option instead. Jameson: ”I’m not too familiar with stock options. Could you explain to me what they are?” Marks: “Sure. Executives at Telstar have been eligible to receive stock options for years. The goal was to tie management’s compensation more closely to increases in shareholder value. Although our stock has performed erratically over the last ten years, the board continues to believe that stock options are the best form of incentive compensation. Because the options represent the right to buy Telstar stock at a set price, after a set period of time, management has an incentive to take actions to...
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