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Columbia Law School

2001

Indexed options

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Tax Constraints On Indexed Options, David M. Schizer Jan 2001

Tax Constraints On Indexed Options, David M. Schizer

Faculty Scholarship

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 ...