- 43 -
statements. Dr. Hakala believed that the TYE 1998 proxy
statements reflected compensation for services performed in TYE
1998.
(iii) LTI Valuation Methodology
In contrast with Mr. Rowley’s approach to valuing LTI
compensation, Dr. Hakala used the Black-Scholes option-pricing
model (Black-Scholes)42 to determine the theoretical value of the
stock options. Both Mr. Rowley and Dr. Hakala agree that Black-
Scholes is a method for valuing stock options generally accepted
by valuation experts. To arrive at the values of the stock
options, Dr. Hakala considered the following five Black-Scholes
variables: (1) Underlying stock price, (2) exercise price, (3)
volatility, (4) risk-free interest rate, and (5) time to
expiration of the option.
After computing the Black-Scholes values of the stock
options, Dr. Hakala took a 50-percent discount to arrive at a
“market value”. According to Dr. Hakala, as a result of certain
Black-Scholes assumptions, for example, the assumption that
investors are risk-neutral, Black-Scholes artificially inflates
stock option values. In reality, Dr. Hakala explained, CEOs are
risk averse and exercise their options early or, due to death,
disability, retirement, resignation, or termination, forfeit
42See Black & Scholes, “The Pricing of Options and Corporate
Liabilities”, 81 J. Pol. Econ. 637 (1973).
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