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

21 Pages Posted: 6 Jun 2004

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

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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 an SOP. In contrast, the influence of taxes on the benefits of an SOP remains widely unperceived. This article deals with both cost and benefit aspects simultaneously by integrating taxation into a pricipal-agent model in which the agent is compensated in options. By deriving the optimal quantity of options to be granted and the optimal exercise price to be set, we can quantify the resulting profits for managers and shareholders. By comparing the results in a tax-free world to results that take into account different levels of taxation, we can identify several tax-induced incentive distortions.

Keywords: Mangerial Renumeration, Principal-Agent, Stock Options, Taxation

JEL Classification: D82, H25, M41

Suggested Citation

Niemann, Rainer and Simons, Dirk, Costs, Benefits, and Tax-Induced Distortions of Stock Option Plans. Available at SSRN: https://ssrn.com/abstract=555063

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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