Robust Stock Option Plans

The introduction of the accounting standards SFAS 123R and IFRS 2 forexecutive stock options has led to an important change. As companies arenow forced to value their stock options at grant date for accounting purposes,the robustness of prices against the choice of certain valuation models andinput parameters has become a very important issue. We address this issueby first analyzing certain building blocks of existing stock option plans withregard to their robustness properties. Based on our analysis, we then showhow robustness of stock option plans can be achieved. The resulting stockoption plans are both transparent in structure and reasonable in respect to theincentives they provide in order to increase shareholder value. We thereforeconclude that stock options can be reliably expensed, if the correspondingplans are properly designed.[...]