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Hello Mike
Hope you are fine.My question is about “ performance conditions ” in a share based payment (Equity-settled) scheme.
Suppose the current market value of the shares of a company is 10$ and the company says we will grants 1,000 shares to each director if market values of the shares reaches to say 20$.1- Should we ignore this condition because it is related to the market value !!? If yes, then WHY?! Why we the company should ignore this important factor? Suppose the company set a crazy condition!For example we will grant 1,000 shares if market value of each shares reaches 10000$ ! Then obviously this condition will never be satisfied! Then whey we should yet ignore it ?!
2 – What types of condition should be ignored and what types of condition should NOT be ignored ?
Thank you AS ALWAYS
Kind RegardsHi, yes, I had missed it
Conditions that relate to market value are ignored in our calculations because the value of the grant takes the change in market value into account.
Now getting to your hypothesis – what do you think would be the value of the grant where the market value of the share has to reach $10,000?
I think one has to be realistic in this type of situation!
Hello Mike
Thanks for your reply.1 – You said : “the value of the grant takes the change in market value into account.”
It is a little vague for me. You mean as the target share price increases, the numbers of the granted shares should also be increased?
For example the company will grant 1000 shares to each employee if share prices reach $20 but if the company wants that share price reaches $30 then it should grant say 2000 shares to each employee ?2- If the above answer is YES, then the answer to your question is something crazy too, for example the company should grant 10 millions shares to each employee!! And although we know that this is unreasonable but the company can recognise a huge expense!!
Kind Regards
No, that’s not what I mean!
In the calculation of the benefit, we use a value for the benefit of the option that’s being granted. This value is independently arrived at in practice I believe and, for example, isn’t the Black Scholes model something to do with this.
The valuers that arrive at this figure presumably consider the likelihood of the share value arriving at (in your more recent post) $30 and, if it’s an improbable target, will likely value the option very low – it’s not likely to happen that the options will be taken up
Better?
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