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Costs, Benefits, And Tax-Induced Distortions Of Stock Option Plans

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  • Rainer Niemann
  • Dirk Simons
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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 principalagent 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.

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    Bibliographic Info

    Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

    Volume (Year): 55 (2003)
    Issue (Month): 4 (October)
    Pages: 321–341

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    Handle: RePEc:sbr:abstra:v:55:y:2003:i:4:321-341

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    Related research

    Keywords: Managerial Renumeration; Principal-Agent; Stock Options; Taxation.;

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    Cited by:
    1. Ewert, Ralf & Niemann, Reiner, 2012. "Steuern in Agency-Modellen: Mehrperioden- und Multi-Task-Strukturen," arqus Discussion Papers in Quantitative Tax Research 135, arqus - Arbeitskreis Quantitative Steuerlehre.

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