Employee Share Options


Employee Share Options

Employee share ownership has become an important component of today’s corporate incentive strategies. Until recently, few companies with share-based compensation schemes such as employee share options, phantom stocks, and share appreciation rights, have taken their true costs into consideration.

New accounting requirements

In order to properly recognise the costs of these schemes, new accounting standards were introduced around the world requiring companies to expense their share-based compensations. Hong Kong companies will be required for the first time to comply with such standards starting from the 2005 financial year.

Adoption of this new standard could result in lower reported profits, which could potentially lead to lower dividends and share price for some companies. Are you prepared for it?

What is the fair value?

The amount of expense will depend on the fair value of these share-based benefits. Determining the proper value for these benefits is no simple task as there is no market price for them. As a result, fair value is estimated using valuation techniques after taking economic data and employee behaviours into consideration, which would require a significant amount of professional judgement.

The Real Consulting Valuation Services

Real Consulting provides comprehensive valuation services for share-based compensations which includes the following areas:

Expense valuation (such as HKFRS2)
Fair value assessment of share-based payments
Cost and return analysis on design, restructuring & repricing

Our proprietary valuation software is flexible but powerful in modelling real-life situations including sub-optimal early exercise behaviours, black-out periods, time-dependant assumptions such as risk-free rates and volatility rates. In some cases, by applying the right model could lower expense significantly.

How confident are we? Financial Accounting Standards Board (FASB) in the US is our software to generate their FAS 123 examples.

Effective Plan Designs

The reality is, employee share options is a cost of the company. Are you making the best use of your employee share options program? What reward did your company receive by providing such benefits to your employees?

More employers are now questioning the effective use of their employee stock option programs and how they can be realigned to shareholder’s key interests.

At Real Consulting, we can help your company to maximise the effectiveness of your employee share option plans by redesigning the plan to align the employee’s reward with shareholder’s interests. Once this is done, an effective communication program is needed to ensure employees share the common goal. After all, there is no value if no one understands them.

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