How do economic experts valuate employee stock options?
Depending on the plaintiff, lawsuits involving allegations of back and front pay damages may involve complex analyses of executives and highly compensated individuals. Unique factors taken into consideration by economic experts in these cases can include employee stock options and complex bonus structures based on company performance.
Economics perform employee stock option valuations to answer the fundamental question: What is the present day value of the employee stock option? This is distinct from calculating the value of the underlying stock, and requires a more nuanced and complex analysis.
The valuation of an employee stock option involves consideration of all possible stock price outcomes that could occur, and an economist calculates the value of the stock option based on that range of possible stock price outcomes. An expert takes into account the full range of investment returns based on the volatility of the stock price in his or her calculation of any losses that may be related to employee stock options.
Stock option plans are designed and implemented differently at each company. An economist performing a valuation of stock options examines the specific stock option plan structure that is in place for employees, which may vary based on factors such as position and length of time employed. In an analysis, economists also review any acquisitions or changes to the company that may have impacted the stock option plans during the period of time relevant to the lawsuit.
Many stock option plans are designed such that unvested shares are forfeited upon termination. When grounds for termination are questioned in a lawsuit, economic experts will examine the implications of unlawful termination in relation to employee stock option losses. Some employers have faced allegations that terminating employees for cause, which could lead to the cancellation of unexercised vested options, is a strategy to reduce employer costs.
Related Resources:
‘Estimating Damages Associated with Stock Option Compensation in Wrongful Termination Lawsuits‘ by Peter Brous, Ph.D. in the Journal of Forensic Economics
‘Executive Stock-Based Compensation: A Case Study in Valuing Employee Stock Options and Restricted Stock Issues in a Breach of Contract Case‘ by Dwight Steward, Ph.D. on the Social Science Research Network
‘Companies Investigated for Handling of Stock Options‘ by Heidi Turner on Lawyers and Settlements online.