Question

Case: Superconductor Technologies, Inc.

This case describes the compensation and incentive plans used by a high-technology company for its top-30 managers. The company is unusual in that it has been in business for 17 years, yet has never earned a profit. As such, it can still be viewed as a start-up company, but a mature one. The compensation packages consist of base salary, cash bonuses, and stock options. The case provides opportunities to discuss issues, such as measurements, style of evaluations, and payout leverage, related to, particularly, the bonus and stock option components of these packages, as well as the entire compensation system.

Questions:

1. Assume that you, as an STI employee, were awarded options on 1,000 shares of STI stock today at the current market price.
   1. Without doing a detailed numerical calculation, make your best-guess estimate as to the economic value of this option grant. What factors did you consider in making your estimate?
   2. Would this option grant likely affect any of your behaviors? If so, how?
2. Should the accounting rule change requiring the immediate expensing of the value of stock options granted (which has now happened) cause STI to make any changes to its system? If so, which?
3. Will STI have to make changes to its system when it expands internationally and employs managers in locations such as London and Shanghai? If so, which?

Answer 1

Factors to consider estimate on economic value of the option grant of 1000 shares at current market price:

1) Stability of the company as it is in business for 17 years.

2) Earning capability: Company has never earned profit in last 17 years

3) Debt to Equity ratio

ESOP granted to Employee will all the moral of staff and gets a feeling of ownership in the company, which will motivate the employee towards organisational goal.

Accounting value for ESOP is calculated by taking maximum of excess of fare value; excess of option discount with 20% of employees compensation and 0

No need to change the system, as the existing employees account will continue with same system.