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


  • Rainer Niemann
  • Dirk Simons


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.

Suggested Citation

  • Rainer Niemann & Dirk Simons, 2003. "Costs, Benefits, And Tax-Induced Distortions Of Stock Option Plans," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 55(4), pages 321-341, October.
  • Handle: RePEc:sbr:abstra:v:55:y:2003:i:4:321-341

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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.
    2. repec:spr:busres:v:11:y:2018:i:1:d:10.1007_s40685-017-0054-y is not listed on IDEAS

    More about this item


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

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting


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