Question

Do you think that a firm that uses employee stock options should focus on using earnings-based valuation because it focuses on wealth creation and ESO’s are a way for firms to save money and increase the wealth of their employees as a reward?

Answer 1

ESO's are a way to motivate employee which is given as a reward for their hard towards the company.

The employee will be motivated for various factors given below:

1) Value of Stock serves as money benefit for the employee.

2) It is a type of savings and employee will enjoy both dividend income and capital gain. SO, it will create wealth for the employee on perpetuity basis.

3) As now, employee is an equity share holder of the company, he will think of company's benefit from owner's perspective and it will be a key point for the employee to work harder.