The NASPP Blog

I bet there was a time (think grade school) when you questioned whether you’d ever use weighted averages in “real life.” Then, surprise, you find yourself in a job where, from the reports you run to the financial disclosures your company makes, weighted averages appear everywhere and you’re expected to understand why and how to use them.

Weighted Averages and Equity Compensation

Common areas where weighted averages are used in equity compensation include:

• Reporting Section 16 same-day, same-way purchases and sales on an aggregate basis
• Determining and disclosing shares outstanding for EPS purposes, i.e., basic and dilutive
• Proxy reporting e.g., Equity Compensation Plan Information
• Financial statement disclosures, e.g., Stockholders Equity

Weighted averages in plain English, please?

Calculating a weighted average is different than calculating a simple average because some of the values matter more than others in the final equation. Thus, not every value in a weighted average calculation is treated equally; instead, different levels of importance are placed on certain values depending on their weight or worth.

Example

Let’s look at an example to examine how a weighted average is calculated. Assume that a company has two options that are outstanding: option #1 is for 100 shares at a exercise price of $10 per share and option #2 is for 400 shares at an exercise price of $20 per share.

• Straight Average: To calculate a straight average exercise price, add $10 to $20 and divide by two (because there are two options), to produce an average exercise price of $15 per share.
• Weighted Average: For a weighted average exercise price, the per share amount is “weighted” by the number of shares in the associated option. To calculate this average, add $1,000 ($10 x 100 shares) to $8,000 ($20 x 400 shares), then divide by the total number of shares outstanding, or 500 shares. The resulting average is $18 per share, three dollars higher than the straight average because the option for more shares carries more weight in the calculation. This raises the average because the option has a higher exercise price than the smaller option.

Why Weightings?

Weightings are important in mathematics because averages can be disproportionately impacted by extreme values. While weighted averages aren’t immune to this, weighting the average at least ensures that the largest items in the data set have the greatest impact on the average value.

-Robyn