Executive Options: Valuation and Projection Methodologies

The valuation of options awarded to senior executives of listed companies is a high profile and contentious issue. The following paper is concerned with the valuation of executive options - particularly those involving performance hurdles. Given the complexity of the underlying benefit designs, valuation of these options will frequently require simulation techniques. Accordingly the paper sets out methodologies for these techniques, within the risk-neutral framework commonly used for pricing options on shares. A methodology for estimating probabilities of achieving performance hurdles is also put forward.