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

Rainer Niemann and Dirk Simons

Schmalenbach Business Review (sbr), 2003, vol. 55, issue 4, 321–341

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.

Keywords: Managerial Renumeration; Principal-Agent; Stock Options; Taxation. (search for similar items in EconPapers)
JEL-codes: D82 H25 M41 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (5)

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