Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged)

Sally Jameson, a second-year MBA student at Harvard Business School, was thrilled but confused. It was late May 1992, graduation was approaching, and she had finally landed the job of her choice. She had just finished an early morning telephone conversation with Bob Marks, the MBA recruiting coordinator at Telstar Communications, a large, publicly held multinational company. Mr. Mark had offered Ms. Jameson a unique position in operations at Telstar, and from the description, it sounded exactly like the job that she wanted Since her first interview with Telstar, she had been very impressed with the company and its people while Ms. Jameson was certain that she …show more content…
At that point, you gains on the shares(equal to the difference between their fair market value at that time and $3500) will be taxed at either ordinary tax rates or at capital gains rates, depending on whether you’ve held the stock for less than or more than one year after exercising the option. If you choose the cash signing bonus, it is taxed at ordinary tax rate? It’s your choice, Sally, but just between you and me, I’d take the case bonus. Telstar stock is only at $1875; it doesn’t seem to me that these options are worthe the paper thatr they’re printed on I think it’s just another example of consultants trying to justify their fees. You do what you think it best; either way, though, I need to know by tomorrow if you accept the offer and, if you do, which compensation package you’d prefer “

While Bob Marks seemed to prefer the cash bonus, Sally Jameson was less sure. Taking out her Wall Street Journal, she noticed that both short-term and long-term. Telstar options were traded (seed Exhibit 1).