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Market Symmetry And The Tax Efficiency Of Equity Compensation, David I. Walker
Market Symmetry And The Tax Efficiency Of Equity Compensation, David I. Walker
Faculty Scholarship
At first blush, the deferral of employee income recognition associated with equity compensation appears to provide a tax advantage in a rising market but an offsetting disadvantage in a declining market. Merton Miller and Myron Scholes argued, however, that this apparent symmetry is misleading and that employees can hedge to ensure tax efficiency despite market uncertainty. This article demonstrates that the effect of employee hedging is fairly small, but that a combination of factors, including capital loss limitations, the possibility of employee-favorable ex post adjustments to equity compensation arrangements, and employee hedging, do cause compensatory stock grants and nonqualified options …
Is Equity Compensation Tax Advantaged?, David I. Walker
Is Equity Compensation Tax Advantaged?, David I. Walker
Faculty Scholarship
Employees who receive stock options and other forms of equity compensation generally are able to defer paying tax on this compensation for years, sometimes decades. In a rising market this deferral results in a tax benefit at the employee level. This article asks whether the employee-level tax benefit in a rising market results in a global tax advantage for companies that rely heavily on equity compensation and their employees. There are two primary issues. First, on initial inspection one might conclude that the employee-level benefit in a rising market is offset by a disadvantage in a stagnant or declining market. …