Employee Stock Options are becoming an increasingly popular method used by employers to reward key personnel. Employees are offered the option to purchase shares of the company they work for at a pre-determined price at any point after the options have vested. The value of the option to the employee is calculated using the Black-Scholes model, taking into account various factors such as the assumed discount rate, the current share price, the expected dividend yield, and the historical volatility of the share price.

The uncertainty surrounding these factors is exacerbated by:

• The point at which the share option will be exercised by the employee
• The market price of the share at the time of exercise
• The perceived profit to the option-holder of exercising the option

By acquiring an in-depth understanding of the companies’ ESOP schemes, the accounting standards, and the workings of the Black-Scholes formula, we not only help suggest appropriate assumptions to be used for the model, but also provide the value of the option as on each expected exercise date based on the vesting schedule of the grant.

Using a highly flexible model, we can advise clients on the nuances of Employee Stock Options such that the company is able to structure the scheme in a way that minimises the costs and underlying risks.