In-House Counsel

Does Black-Scholes give a value for restricted stock awards?

By Rees Morrison

The Small Law Department Compensation Survey conducted by the ACC and Empsight,includes in the term ?LTI Valuation? (long-term incentive) three elements: the value of stock options, the value of restricted stock awards, and any long term cash awards. The survey report uses the Black-Scholes methodology to calculate the value of stock options (See my post of Nov. 25, 2006: stock options with 11 references; and Aug. 12, 2008: stock options.). It then simply says it uses ?the value of Restricted Stock awarded.?

Maybe there is a calculation method for restricted stock, but surely they cannot simply use the market value of stock on the day the stock are awarded, or the cut-off date of the survey (March 1, 2008). Restricted stock vest on different schedules, such as one-quarter each year for four years, and since who knows what the future value will be, the valuation of such an award must be difficult. Unless, that is, Black-Scholes or some similar formula also applies (See my post of Jan. 17, 2006: Black-Scholes formula; July 27, 2007: the lattice-binomial method of valuation; Jan. 24, 2006: software to calculate the formula; and July 25, 2007: the binomial method.).

Many people argue that awards of restricted stock are better than grants of stock options, because people must act to realize gain on options and options can lose all value. Restricted stock can't become worthless

Full post as published by Law Department Management on January 20, 2009 (boomark / email).