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Editor: PAMELA J. PERUN
Urban Institute
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Copyright: SSEP, Inc. 2001. All rights reserved.
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Topic of This Issue:
Employee Stock Options
___________________________________________________________
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T A B L E of C O N T E N T S
_________________________________________________________________
NEW and FORTHCOMING ARTICLES
"Tax Treatment of Employee Stock Options in Mergers and
Acquisitions"
Tax Notes, Vol. 90, No. 9, February
26, 2001
J. SHANE STARKEY
Thompson Hine LLP
"Having Your Options and Eating Them Too: Fences, Zero-Cost
Collars and Executive Share Options"
Company & Securities Law Journal,
Vol. 18, pp. 277-282,
June 2000
PAUL USMAN ALI
University of Queensland
GEOF STAPLEDON
University of Melbourne
Faculty of Law
"ISOs Meet the AMT: Employees Ambushed by the Tax Code"
Tax Notes, Vol. 91, No. 14, June 18,
2001
ROBERT L. SOMMERS
Independent Affiliation
"The Effect of Employee Stock Options on the Evolution of
Compensation in the 1990s"
Economic Policy Review, Forthcoming
HAMID MEHRAN
Federal Reserve Bank of
New York
Research Department
JOSEPH S. TRACY
Federal Reserve Bank of
New York
Domestic Research
National Bureau of Economic
Research (NBER)
WORKING PAPERS
"Accounting for the Tax Benefits of Employee Stock Options and
Implications for Research"
TERRY J. SHEVLIN
University of Washington
MICHELLE HANLON
University of Washington
"Employee Stock Ownership vs. Profit Sharing"
RICK HARBAUGH
Claremont McKenna College
S S R N I N F O R M A T I O N
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EDITORIAL POLICIES
To provide the broadest coverage of research in Employee
Benefits, Compensation and Pension Law we do not referee working
papers. We accept abstracts of working papers in Employee
Benefits, Compensation and Pension Law whose topics suit the
coverage of the journal and which are part of the worldwide
scholarly discourse.
N E W and F O R T H C O M I N G
Articles
_________________________________________________________________
"Tax Treatment of Employee Stock Options in Mergers and
Acquisitions"
Tax Notes, Vol. 90, No. 9, February
26, 2001
BY: J. SHANE STARKEY
Thompson Hine LLP
Contact: J. SHANE STARKEY
Email: Mailto:Shane.Starkey@ThompsonHine.com
Postal: Thompson Hine LLP
312 Walnut
Street
14th Floor
Cincinnati,
OH 45202-4089 USA
Phone: (513) 352-6737
ABSTRACT:
As a result of their popularity, employee stock options are
often a significant consideration when deciding how to structure
the sale or acquisition of a business. The tax consequences of
an assumption, cancellation, or acceleration of the options
differ dramatically depending on how the transaction is
structured. In this article, Starkey discusses some of these
tax
consequences.
______________________________
"Having Your Options and Eating Them Too: Fences, Zero-Cost
Collars and Executive Share Options"
Company & Securities Law Journal,
Vol. 18, pp. 277-282,
June 2000
BY: PAUL USMAN ALI
University of Queensland
GEOF STAPLEDON
University of Melbourne
Faculty of Law
Paper ID: U of Melbourne, Public Law Research Paper No. 17
Contact: PAUL USMAN ALI
Email: Mailto:pau_ali@hotmail.com
Postal: University of Queensland
T.C. Beirne
School of Law
St. Lucia
4072 Brisbane,
Queensland AUSTRALIA
Phone: +61 7 3365 2206
Fax: +61 7 3365 1454
Co-Auth: GEOF STAPLEDON
Email: Mailto:g.stapledon@law.unimelb.edu.au
Postal: University of Melbourne
Faculty
of Law
Victoria
3010, AUSTRALIA
Note: This is a description of the paper and not
the actual
abstract.
ABSTRACT:
The vast majority of senior executive remuneration packages in
Australia contain share options issued under an Executive Share
Option Plan ("ESOP"). It is common for these option
entitlements, particularly at the chief executive and chief
operating officer levels, to dwarf the cash component of the
package.
ESOP options perform the important economic function of
aligning executive self-interest with the interests of
shareholders. This alignment endures only for so long as the
options are retained by the executives. Accordingly, an ESOP
will invariably prescribe a vesting period during which the
participating executives are not permitted to exercise or
transfer their options.
This article examines how options, in particular option
strategies known as "fences" and "zero-cost collars", can be
used by executives to extract value or lock-in gains in respect
of ESOP option entitlements during a vesting period. The article
also considers the regulatory constraints on the use of these
strategies. The authors conclude that the substantive disclosure
rules of the Australian Corporations Law do not apply to
cash-settled fences/zero-cost collars. In addition, the
prohibitions against insider trading can be avoided by an
appropriately structured fence/zero-cost collar.
Finally, the article discusses the corporate governance
concerns arising out of the use by executives of fences and
zero-cost collars. These option strategies effectively decouple
the interests of executives from those of shareholders and
consequently destroy the economic rationale for the grant of
ESOP options to executives.
JEL Classification: G18, G34, K22
______________________________
"ISOs Meet the AMT: Employees Ambushed by the Tax Code"
Tax Notes, Vol. 91, No. 14, June 18,
2001
BY: ROBERT L. SOMMERS
Independent Affiliation
Contact: ROBERT L. SOMMERS
Email: Mailto:rls@taxprophet.com
Postal: Independent Affiliation
San Francisco,
CA USA
ABSTRACT:
In this report, Sommers describes how the AMT caused economic
ruin to thousands of middle-class workers who exercised
incentive stock options during 2000. Sommers traces the history
of the AMT as applied to employee stock options, using a
taxpayer's actual circumstance to illustrate how the tax law
produced this financial crisis. Sommers offers several
legislative solutions, and suggests how the IRS should apply
the
offer-in-compromise process to achieve a fair and equitable
result.
______________________________
"The Effect of Employee Stock Options on the Evolution of
Compensation in the 1990s"
Economic Policy Review, Forthcoming
BY: HAMID MEHRAN
Federal Reserve Bank of New York
Research Department
JOSEPH
S. TRACY
Federal Reserve Bank of New York
Domestic Research
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=272482
Contact: JOSEPH S. TRACY
Email: Mailto:joseph.tracy@ny.frb.org
Postal: Federal Reserve Bank of New York
Domestic
Research
33 Liberty
Street
New York,
NY 10045 USA
Phone: 212-720-6344
Fax: 212-720-1844
Co-Auth: HAMID MEHRAN
Email: Mailto:hamid.mehran@ny.frb.org
Postal: Federal Reserve Bank of New York
Research
Department
33 Liberty
Street
New York,
NY 10045 USA
ABSTRACT:
Between 1995 and 1998, actual growth in nominal compensation
per
hour (CPH) accelerated from approximately 2 percent to 5
percent. Yet as labor markets continued to tighten in 1999, CPH
growth paradoxically slowed. In this article, we attempt to
solve this aggregate wage puzzle by exploring whether changes
in
pay structure - specifically, the increased use of employee
stock options - can account for the behavior of CPH in the late
1990s. CPH reflects the value of employee stock options on the
date they are realized and not on the date they are granted.
When we recalculate CPH growth to reflect the value of current
stock options when they are granted, we find that our adjusted
CPH measure accelerated in each year from 1995 to 1999.
JEL Classification: J33, J38, G10
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Accounting for the Tax Benefits of Employee Stock Options and
Implications for Research"
BY: TERRY J. SHEVLIN
University of Washington
MICHELLE
HANLON
University of Washington
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=271310
Paper ID: University of Washington, Working Paper
Date: April 2001
Contact: TERRY J. SHEVLIN
Email: Mailto:shevlin@u.washington.edu
Postal: University of Washington
School
of Business Administration
Box 353200
Seattle,
WA 98195-3200 USA
Phone: 206-543 7223
Fax: 206-685 9392
Co-Auth: MICHELLE HANLON
Email: Mailto:mkoehler@u.washington.edu
Postal: University of Washington
Seattle,
WA 98195 USA
ABSTRACT:
This paper explains firm disclosures of the tax benefits of
employee stock options and discusses the implications of this
disclosure for academic research studies and financial statement
users. We do this in order to show that there are important
implications for empirical research studies and inferences
regarding tax burdens. The effects of this accounting have not
often been taken into account in empirical research yet it may
impact the inferences made from the studies. We find that firm
disclosures are not always clear as to the amount of the
corporate tax benefits from the exercise of stock options. In
addition, in many cases, firms' reported effective tax rate are
overstated as are estimates of marginal tax rates and tax
burdens using financial statement disclosures. This study is
important because it explains the accounting for the tax
benefits of stock options, describes the problems this
accounting may cause in empirical studies and for financial
statement users, and provides some suggestions on adjusting for
this accounting to more correctly estimate tax rates and
burdens.
Keywords: Employee stock options; Tax benefits; Effective tax
rates; Marginal tax rate
JEL Classification: M41, H25, G39
______________________________
"Employee Stock Ownership vs. Profit Sharing"
BY: RICK HARBAUGH
Claremont McKenna College
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=272595
Other Electronic
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Date: 2000
Contact: RICK HARBAUGH
Email: Mailto:rick.harbaugh@mckenna.edu
Postal: Claremont McKenna College
Claremont,
CA 91711-6420 USA
ABSTRACT:
The idea that profit sharing increases employment has been
widely tested, but the theoretical basis for the claim is weak,
and the empirical results are ambiguous. This paper shows that
employee stock ownership based on individually-held equity
stakes avoids the problems of traditional profit sharing.
Employee stock ownership shifts employment to the efficient
level by either raising employment from an initial state of
underemployment or decreasing it from an initial state of
overemployment. Since the effect on employment is not
unidirectional, empirical tests need to differentiate between
traditional profit sharing and employee stock ownership and to
condition on the initial state of employment.