365 stock options major form of compensation of us

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: iming, small long-term response 13 Source: Goolsbee (2000), p. 365 STOCK OPTIONS Major form of compensation of US top executives. Theoretical goal is to motivate executives to increase the value of the company (stock price P (t)) Stock-option is granted at date t0 allow executives to buy N company shares at price P (t0) on or after t1 (in general t1 − t0 3 − 5 years = vesting period) Executive exercise option at (chosen) time t2 ≥ t1: pays N · P (t0) to get shares valued N · P (t2). Exercise profit N [P (t2) − P (t0)] (considered and taxed as wage income in the US) After t2, executive owns N shares, eventually sold at time t3 ≥ t2: realized capital gain N [P (t3) − P (t2)] (taxed as capital gains) 15 Income Shifting: Corporate And Individual Tax Base Businesses can be organized as corporations or unincorporated businesses [also called pass-through entities] Corporate profits are first taxed by corporate income tax [rate τc ] Net-of-tax profits are taxed again when finally distributed to shareholders. 2 distribution options: a) dividends [tax rate τd] b) retained profits increase stock price: shareholders realize capital gains when finally selling the stock [tax rate τcg ] For unincorporated businesses (sole proprietorships, partnerships, S-corporations) profits are taxed directly and solely as individual income (rate τi) 16 CORPORATE AND INDIVIDUAL TAX BASE Corporate form best i...
View Full Document

This note was uploaded on 01/23/2014 for the course ECON 131 taught by Professor Karp during the Spring '07 term at University of California, Berkeley.

Ask a homework question - tutors are online