Tax Constraints on Indexed Options
20 Pages Posted: 20 Mar 2001
Date Written: January 1, 2001
Abstract
Indexed stock option grants reward executives for outperforming a benchmark, such as the market as a whole or competitors in the same industry. These options offer superior incentives by diminishing the influence of factors beyond an executive's control, such as general market and industry conditions. Yet indexed options are almost never used. Professor Saul Levmore seeks to explain this puzzle with norms. The main point of this comment on his Article is that tax plays a larger role in this puzzle than Professor Levmore acknowledges, although tax is not a complete explanation. The tax appeal of traditional options is that they offer value that is not really performance-based (i.e., a bet on the market as a whole), but nevertheless is treated as "performance based" under Section 162(m) - and thus is deductible without limitation. Accounting and Professor Levmore's norms-based account are then briefly considered.
Keywords: Indexed options, tax, Section 162(m), accounting
JEL Classification: H25, J33, M41
Suggested Citation: Suggested Citation
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