Employee Share Option Awards (Equity Settled)

Valuation of Employee awards share options. Black-Scholes-Merton (BSM)

by Sandro Charles Grech
Assurance Manager, Ernst & Young MaltaFollow

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Description
Structured but basic model to account for Share-based payments awarded to employees (equity settled).
The excel file includes a break down of the formula to make sure one can understand what in being included. This makes it easy for users to understand what is happening within the BSM formula.

The excel file includes a tab with the methodology of how to calculate price volatility, a key input for the BSM model.

Furthermore, the excel file includes a tab with a sensitivity analysis to help one understand the effect of any given input, whilst other inputs kept unchanged. For example, one can see the effect on the value of the option if there is a change in the underlying price only, or the risk-free rate only. This analysis makes it easy to understand which inputs have a greater bearing on the value of the option. Thus one is able to measure possible mistakes.

Inputs to the model include:
> underlying price
> exercise price
> grant period
> vesting period
> volatility (methodology of how to calculate included)*
> risk free rate
> dividend yield

*this can be used to calculate price volatility to be used for other preferred BSM models

The excel file also includes an accounting tab whereby it provides the cost to be accounted for up to maturity (vesting period) on a monthly basis.

This Best Practice includes
1 Excel file