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c. LTI Compensation Valuation Methodology
Alleging that Dr. Hakala’s valuation method, combining
Black-Scholes, a 50-percent discount for risk aversion, and a 3-
year moving average, was “fatally flawed” and “grossly
undervalued” the LTI compensation, petitioners urge us to adopt
Mr. Rowley’s valuation methodology. First, petitioners assert
that Black-Scholes is incapable of predicting actual gains with
respect to LTI compensation and that it understates the value of
stock options by placing a high premium on volatility and
discounting the value of successful companies with sustained
growth. Calling Dr. Hakala’s use of a 50-percent discount for
risk aversion “arbitrary”, petitioners claim that this approach
fails to differentiate between long-term CEOs and other
executives. Lastly, petitioners object to Dr. Hakala’s use of a
3-year moving average, arguing that it produced a significantly
lower value for the LTI compensation by combining “substantially
less successful” years with TYE 1998.
In contrast, respondent asserts that we should adopt Dr.
Hakala’s valuation methodology and entirely disregard Mr.
Rowley’s use of the Growth Model. At trial, Dr. Hakala testified
that the Growth Model is not a generally accepted method for
valuing stock options and questioned whether any valuation expert
would accept Mr. Rowley’s methodology.
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