Costs, Benefits, and Tax-Induced Distortions of Stock Option Plans

34 Pages Posted: 11 Dec 2002

See all articles by Rainer Niemann

Rainer Niemann

University of Graz, Center for Accounting Research; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Dirk Simons

University of Mannheim - Accounting and Taxation

Multiple version iconThere are 2 versions of this paper

Date Written: December 2002

Abstract

In recent years stock option plans (SOPs) have become an important component of managerial remuneration in most industrialized countries. Commonly accepted, corporate as well as individual taxes have a major impact on the costs of a SOP. In contrast, the tax influence on the benefits of a SOP remains widely unperceived. This article deals with both "cost and benefit" aspects simultaneously by integrating taxation into a principal-agent model, where the agent is compensated in options. Deriving the optimal quantity of options to be granted and the optimal exercise price to be set, resulting profits for managers and shareholders can be quantified. By comparing the results in a tax-free world to the results taking into account different levels of taxation, several tax-induced incentive distortions can be identified.

Keywords: Stock Options, Principal-agent, Taxation

JEL Classification: D82, H25, M41

Suggested Citation

Niemann, Rainer and Simons, Dirk, Costs, Benefits, and Tax-Induced Distortions of Stock Option Plans (December 2002). Available at SSRN: https://ssrn.com/abstract=360920

Rainer Niemann (Contact Author)

University of Graz, Center for Accounting Research ( email )

Universitätsstr. 15 / G2
Graz, 8010
Austria
+43-316-380-6444 (Phone)
+43-316-380-9595 (Fax)

HOME PAGE: http://www.uni-graz.at/steuer

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Dirk Simons

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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