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365 stock options major form of compensation of us

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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...
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