The Historical Exercise Factor, or the amount at which the stock price has exceeded
the exercise price at settlement historically, can be interpreted from the historical
data. The Historical Exercise Factor is an input into the Lattice Barrier Model and
because it is a calculation driven by historical activity - similar to the expected term
input needed for the Black-Scholes-Merton formula - it is essential to have the
flexibility to calculate this assumption in an intricate manner.
To stipulate that only certain data is included in the calculation, you may apply
grant and exercise window filters and also settlement percentage filters (similar to
the expected term filters) to the model. This ensures a robust calculation that only
considers data genuinely representative of the perceived future state of your
company.
It is important to note that this calculation follows the exact same steps as the
Historical Expected Term with one exception, the "time-to-settlement" calculation.
Instead of calculating a "time-to-settlement" and computing a weighted average by
the transaction shares, an "in-money-ratio" is calculated from the same available
data, and then weighs that data by the transaction shares in order to determine
the required sub-optimal historical exercise factor. Keeping the calculation the
same for both Historical Expected Term and Historical Exercise Factor is easier in
the long-term since modifications to the calculations are captured and maintained
in one place.
If groups of optionees have been designated in the data, the historical exercise
factor is calculated at each group level. Support statistics including the number of
options included in the calculation, the number of transaction records included in
the calculation and the actual weighted average historical exercise factor for each
group and also for the entire designated sample (essentially the selected data
based on the filters previously applied with no groups assumed) is also generated.
Statistics for each group (if you elected to use the Groups function), and statistics
for the entire pool of optionees will be presented as Your Selection for Historical
Exercise Factor. The weighted average calculated holding period is utilized as the
expected life for each respective group. If do not select any groups, "No Groups"
will be displayed in the Group Name column of the table.
To calculate Historical Exercise Factor:
1. Enter an as-of date. The default is the current date. However, the as-of
date should be changed to the end of the reporting period or last day of the
period you are analyzing. You may also select an as-of date by clicking on
the calendar icon and selecting a date from the calendar.
2. Award Type Filter Selection: This filter allows you to generate a historical
exercise factor values for one or multiple option-type awards. The choices
are NQ, ISO and SAR. The default checked selection is NQ and ISO.
Checking the Award Type allows you to customize the historic exercise
factor value outputs for one or a combination of award types.
3. If desired, select a Filter Type. You may elect to emphasis certain data,
periods of time or particular grants over others in the expected term
calculation. Three filters are provided:
- All History: Includes all grants uploaded, allowing you to leverage all of
the grant data stored in the system to calculate expected term.
- Grant Window: Calculates expected term by looking at historical
exercise decisions relating solely to historical grants that occurred during a
given time window. If selected, Begin date and End date entry fields is
displayed. Enter dates or click on the calendar icon to choose dates from
the calendar.
- Exercise Window: Analyzes all of the exercises in a given time window,
regardless of when the grant originated. If selected, Begin date and End
date entry fields is displayed. Enter dates or click on the calendar icon to
choose dates from the calendar.
4. If desired, select the Apply filter for Percentage of Options Settled. This
applies to firms that are in a position where the unexercised options from
certain grants need to be controlled.
a. Check this checkbox.
b. Enter the percentage of options settled.
Example: If you run a report on the Outstanding Options tab that indicates
a large portion of recent grants are affected by unexercised options, you
could choose to only consider in this calculation those grants which have
had in excess of 75% of the options granted, settled.
5. Click the Calculate button.
The historical exercise factor is calculated and
displayed to the right of the Calculate button.
To save the calculations:
- Click the Save to Selection button. The historical exercise factor
calculation is removed from the page and ‘moved’ to the Historical
Exercise Factor Parameters section at the bottom of the page. The
selection also displays the award type for which that value is applicable.
Note: This information can also be seen on the Your Selection
page.
To remove saved calculations:
- Click the red Remove ‘X’. However, be aware that there is no confirmation
before it is removed.
To create the Audit Report:
- Click the Audit Report Button. A comprehensive audit report displaying the
grants and exercises used in calculating the historical sub-optimal exercise
factor. The Award Type selections are also displayed in the report. The
report displays in a spreadsheet view (.csv format).
To create the Excluded Grant Report:
- Click the Excluded Grant Report Button. A comprehensive audit report
displaying the grants that meet the filtering criteria but were excluded
because they were assumed and/or modified will be generated. MPA Grants
will not show up under this report.