Exhibits 6.16 and 6.17 provide footnote excerpts to the financial reports of The Coca-Cola Company and Eli Lilly and Company that discuss the stock option grants given to the employees of the two firms. Each firm uses options extensively to reward employees for their performance.
Required
a. Explain the concept of vesting. Discuss why firms typically include a vesting feature in the stock-based compensation plans that they offer to their employees.
b. What are the vesting characteristics of the two plans discussed in the exhibits? What effect do they have on stock-based compensation expense using the fair value method as required by Statement No. 123 (Revised 2004)?
c. For each firm,
(1) What is the life of the options granted?
(2) How does option life relate to the vesting period?
(3) Why might the weighted-average expected life of the options be less than the full life of the options?
d. The Coca-Cola Company uses the Black-Scholes valuation model for estimating the fair value of the stock options, whereas Eli Lilly and Company utilizes a lattice-based option valuation model. Both valuation techniques are permitted by GAAP. Perform an Internet search to determine which valuation model is more commonly used by the largest publicly held firms. Speculate on why this is the case.