Sally Case

9-293-053

REV: AUGUST 19, 2003

PETER TUFANO

Sally Jameson: Valuing Stock Options in a

Compensation Package

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. Marks 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 would accept

the job, there was still one unsettled, yet crucial, matter--her compensation.

During the conversation with Marks, Jameson had asked what her compensation package would

be.

Marks: "Well, Sally, we are all very impressed with you and would like to

offer you a starting salary of $50,000. In addition, you will also receive a

signing bonus."

Jameson: "The base salary is a little below what I had expected. Is that

negotiable?"

Marks: "I'm afraid not. That's the same starting package all MBAs get.

However, you will receive a bonus upon accepting our offer. You can receive

$5,000 in cash, or choose stock options instead."

Jameson: "I'm not too familiar with stock options. Could you explain to me

what they are?"

Marks: "Sure. Executives at Telstar have been eligible to receive stock

options for years. The goal was to tie management's compensation more

closely to increases in shareholder value. Although our stock has performed

erratically over the last ten years, the board continues to believe that stock

options are the best form of incentive compensation. Because the options

represent the right to buy Telstar stock at a set price, after a set period of

time,...