With continued economic volatility, companies also need to think about stock-plan valuation issues. Most companies haven’t had to deal with valuation-related challenges for quite some time, but a recent Willis Towers Watson blog discusses considerations, including immediate issues and potential actions for stock options and relative TSR awards.
The discussion of the valuation model for stock options notes that the commonly used Black-Scholes model requires fixed inputs and doesn’t permit flexibility to adjust the volatility and dividend-yield assumptions over time. Here’s an excerpt for a related potential action:
Use of binomial lattice or Monte Carlo models allow for assumption flexibility:
– Volatility can start at today’s elevated levels and revert to long-term historical means
– Dividend yields can start at today’s elevated levels and be adjusted downward over rising share price paths in the model
– Exercises can be assumed to occur sooner in a quick recovery and later in a slow recovery
-Lynn Jokela, CompensationStandards.com May 12, 2020
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