Employee share option valuation models

The widespread adoption of employee share options (ESO) in compensation practice is one of the major recent developments in corporate finance. Although ESO are American call options written by a firm on its own equity, a number of specific contractual features as well as the tax and accounting environment, makes them fairly difficult to value. Selected ESO valuation methods are reviewed below and one of their well-known results, the difference between the model value of the option to the firm and to the employee, is discussed in more detail.