If, when an option is issued, the exercise price equals the market price (and it often does), the intrinsic value is zero which is nonsensical.
The difference between the price when the option is issued and when it is taken up often represents a luscious profit.Unlike their counterparts elsewhere, many American chief executives now receive at least as much compensation in options as in basic pay (see chart 7).
If the value of each option was calculated at $10, using an options-pricing model like Black-Scholes, and 10,000 options were issued to an employee, the total reported expense would be $100,000, with $25,000 taken the first year and the same amount in each of the following years.
Normally, the options are issued with the exercise price set equal to the current price of the stock.
Gucci confirmed that the options were issued, but said the action was taken at two public shareholder meetings, one in June 1999 and the other in June 2000.
The logic to the rule was that since the options would in the end be valuable only if the share price rose, there was no need to record an expense when the options were issued.
Ira Kay of Watson Wyatt, another pay consultancy, reckons that 90% of American quoted companies have some options "under water"—ie, the share price is below that at which the options were issued.
Compared with proposals that require a once-and-for-all valuation at the time the options are issued, the Bulow-Shoven method would probably give a more accurate picture of the cost of outstanding options grants on a continuing basis.
When premium options are issued, the amount that a company will have to expense under standards board's new rules will be lower than the cost associated with plain-vanilla options.
The exercise price is equal to the market price when the options are issued, but the executive has up to 10 years to exercise them, and will do so only if the price has increased.
