Equity Incentive Awards Based on Total Shareholder Return

By: Robert Barnett

Valuation Concepts Applied to Equity Incentive Awards Based on Total Shareholder Return

Share-based payment awards have been a subject of formal valuation for financial reporting and tax purposes since the adoption of FAS 123R in 2004 by the Financial Accounting Standards Board for US GAAP. This significant step immediately made the less familiar use of option-pricing theory a regular mainstay of audited financial statements. Thus, for the first time in a meaningful way, the use of numerical-based valuation models, including lattice and Monte Carlo simulation, became a necessary consideration. At the root of this valuation evolution are the companies choosing to adopt Equity Incentive Plans intent on aligning management and shareholders’ interests. Stock option awards received the lion’s share of initial attention because of their popularity and prevalence, while other forms of awards and their variants were starting to proliferate. Comfort with issuance of share-based payments has led to boardroom creativity around an award’s design that has prompted development of new valuation approaches and methodologies, albeit around familiar theories.

Read the full report for a discussion about:

  • Valuing Restricted Stock Grants
  • Measuring Total Shareholder Return (TSR)
  • Applying an Option Pricing Framework
  • Consideration of Correlation
  • Arriving at a Fair Value Conclusion

For more information regarding valuation services for complex securities and how this topic may impact your business, please feel free to contact the author or another VRC professional.