James Company has 70 executives to whom it grants compensatory share options on January 1, 2013. The plan grants each executive options to acquire a maximum of 100 shares of the company's $7 par common stock at $63 per share after completing 3 years of continuous service. However, the number of options that vest depends on the increase in the company's market share over the 3-year period. The following schedule shows the number of options granted to each executive based on the increase in market share by the end of the service period:
Increase in
Market Share Number of Share
Options Granted
0% to 5% 40
6% to 10% 60
More than 10% 100
Based on past trends, on the grant date, James predicts that its market share will increase about 3% by the end of 2015. At the end 0f 2014, due to its improved market position over the previous 2 years, James revises this estimate of 7%. At the end of 2015, James determines that its market share has increased 9% over the 3-year period.
On the grant date, James estimates that (1) the fair value of each option is $16.25, and (2) its employee turnover rate will be 9% over the service period. At the end of 2014, because of increased resignations, James changes its estimated turnover rate to 12% for the service period. At the end of 2015, 59 executives vest in the plan. On January 17, 2016, 30 executives exercise their options when the stock is selling for $94 per share.