Saras

Options
Case Analysis

Agenda

Introduction & Pay Package Summary

Broad Comparison of 3 Options

Davis & Rockefeller: Analysis

Clear Lake: Analysis

WebScale: Analysis

Conclusion

Introduction

Sara Becker, a graduation MBA student

Analysed the offers on various dimensions:

economic attractiveness of the industries;
the strategic positions and characteristics
of each of the companies; the specific
tasks she would perform etc.

Prime Focus: ability to generate long

term wealth

Stock options - links the performance of the

company to the performance of the
employee

Clear
Davis &
Clear
Lake
Davis &
Rockefell
Lake
(Associate,
Rockefell
er
(Associate,
Strategic
er
(Vice
Strategic
Investmen
(Vice
President) OFFERS
Investmen
t)
President) OFFERS
t)
WebScale
WebScale
(Manager
(Manager
of
of
Marketing
Marketing
& Strategy
& Strategy
Developm
Developm
ent)
ent)

Pay Package Summary:

She analysed the three options with the

help of:

Salary and bonus offered at the three jobs + tax rates

Summarized the terms of the option awards from WebScale and Clear Lake.

Saras guesses of how likely she would stay at each firm for three years, and
what her likely salary might be at that time. Sara estimated the chance of
changing the job in three years time period.

The value of options were a function of a variety of factors: terms of the

contract, market conditions

The implied volatilities of traded options on the two firms from Bloomberg.

To value options - Black-Scholes model

Broad Comparison
Benefits

Davis & Rockefeller

Clear Lake

WebScale

Cash Signing Bonus

Yes

Nil

Nil

Annual Bonus

100 300 %

40% of base + profit

sharing of $10,000 per
year + portion of deal
carry

20% of base salary

Stocks or Stock
Options

None

Standard stock options

OutPerformance Stock
Options (OSOs)

NA-

Stock price at
employees start date

Scaled to account for

gains or losses in market
- S&P stock index

Vesting Period

-NA

options in first 3 years

& options in last 2
years

Options vest over 2 years

with 1/8th options vesting
at end of each quarter

Expiration Period

-NA

5 years

4 years

Benefit

Sara will benefit if the

units performance is
able to get her 300%
annual bonus

Sara will benefit when

stock price rises over
exercise price

Sara will benefit when

WebScales
performance is better
than S&P

Exercise Price

OutPerformance Plan
Number of shares dependent on performance with respect to the S&P Index through
multiplier
Payoff = Multiplier * Dollar Outperformance
Formulae :
Dollar Outperformance = market value of one WebScale share Adjusted Exercise
Price
Adjusted Exercise Price = WebScale stock price at the time of issue * (1+ % change
in value of S&P 500 index since the time of option grant)
Multiplier =(outperform percentage * 8/10) * 100
Outperform % = % change in WebScale stock minus - % change in S&P Index in the
same time
For competitive levels, option grants by awarding dollar value of options analyze
competitors compensation awards and determine price using proprietary options
pricing algorithm

Davis & Rockefeller

Minimum Combination Pay
Year -->
Base Salary
Signing Bonus

Maximum Combination Pay

3

125000 125000 125000 175000 175000

50000

Year -->
Base Salary
Signing Bonus

125000 125000 125000 175000 175000

75000

Annual Bonus (100%)

125000 125000 125000 175000 175000

Total Salary (before

tax)

300000 250000 250000 350000 350000

Total Salary (before

tax)

575000 500000 500000 700000 700000

Tax calculation

90,200.5 35,156.5 35,156.5 90,200.5 90,200.5

0
0
0
0
0

Tax calculation

90,200.5 90,200.5 90,200.5 90,200.5 90,200.5

0
0
0
0
0

Pay Over :

291850 216850 216850 416850 416850

26472.6 26472.6

% over above

115572.
165072. 165072.
85872.6 85872.6
6
6
6

116673. 116673.
1
1

Total Tax

205773. 176073. 176073. 255273. 255273.

1
1
1
1
1

Total Pay after tax

369226. 323926. 323926. 444726. 444726.

9
9
9
9
9

Pay Over:

16850

% over above

6672.6

Total Tax
Total Pay after tax

119750 119750
43110

43110

96873.1 78266.5 78266.5

66850

66850

203126. 171733. 171733. 233326. 233326.

9
5
5
9
9

Annual Bonus (300%) 375000 375000 375000 525000 525000

Option 1: Davis & Rockefeller

500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
Year 1

Year 2

Year 3
Minimum Pay

Maximum Pay

Year 4

Year 5

Black Scholes method

Options pricing Model

Objective: estimates premium on

options.

Formula derived by three

econonomists-Fischer Black, Mayron
Scholes and Robert Merton.

The model looks at the present

value of the strike price (Cash) and
the stock at the time of exercise

Assumptions: Constant volatility and

risk free interest rate, dividend free,
European style options, efficient market
(liquid, equal access to information, fair
and transparent, zero transparent cost,
returns on the stock normally distributed

Expected
benefit of
purchasing the
Formula option

Exercise
prices current
value

Clear Lake
Black-Scholes Option Value
Input Data
Exercise Price of Option (EX)
Number of periods to Exercise in years (t)
Compounded Risk-Free Interest Rate (rf)
Standard Deviation (annualized s)

After 3 years
137
3
6.43%
48.00%

After 5 years
137
5
6.33%
48.00%

Output Data
Present Value of Exercise Price (PV(EX))
s*t^.5
d1
d2
Delta N(d1) Normal Cumulative Density
Function
Bank Loan N(d2)*PV(EX)

112.9653
0.8314
0.6477
-0.1837

99.8312
1.0733
0.8315
-0.2418

0.7414

0.7972

48.2516

40.3795

Value of Call
Value of Put

53.3223
29.2876

68.8321
31.6634

Black
Scholes Call
Black
Value *
Scholes Call
(3840 +
Value *
1920+1920
1920
600000
After 3 years After 5 years )

Clear Lake

Base Salary

175000

175000

500000

Annual Bonus

70000

70000

400000

10000

10000

102393.6

528630.528

Annual Options

Clear Lake: Option 2

300000

200000

Total

357393.6

783630
100000

Tax

117596.3884

288390.58
0

Total Pay after Tax 239797.2116

495239.42

After 3 years
Total Pay

After 5 years

WebScale
Call value at Year

3rd year

39.8

2388.888
9

No of shares

2388

stock price

90

Adjusted exercise price

109.8

Webscales stock at

129.8

% increase 3 years

44.22%

Outperform %

Dollar outperformance

22.22%
17.77777
8
20

payoff

160

Total payoff

426560

Base salary

12500

Annual bonus

2500

Multiplier

5th year
555.555
555
6
As a deffered
2666.38
value
9

> 8; so 8 is taken

assumed value
2666

Offer made by David and Rockefeller is

the
most
lucrative
when
the
compensation and benefits earned only in
the first three years is analysed.

Conclusion

Snapshot of 3 Options
350000

300000

250000

200000

150000

100000

50000

Final Pay
Davis & Rockefeller

Clear Lake

WebScale

Thank You

Presented By:

HR 019

Vaishali Gupta

HR 020

Arpita Gupta

HR 033

Anurag Mohapatra

HR 038

Deepti P.V.L

HR 039

Priyanju Pal

HR 049

Anjum Sheikh

HR 055

Rupam Srivastav