E M P L O Y E E B E N E F I T S , C O
M P E N S A T I O N
A N D P E N S I O N L A W
Vol. 1, No. 2: December 14, 2000
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Editor: PAMELA J. PERUN
Urban Institute
Mailto:pamela@planetnow.com
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T A B L E of C O N T E N T S
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WORKING PAPERS
"Puzzling Stock Options and Compensation Norms"
SAUL LEVMORE
University of Chicago Law
School
"Employee Stock Ownership Plans: A Status Report"
PAMELA J. PERUN
Urban Institute
NEW and FORTHCOMING ARTICLES
"Capital Gain v. Ordinary Income and the FICA Tax Treatment of
Employee Stock Purchase Plans"
Tax Lawyer, Vol. 53, No. 3, Spring 2000
KEVIN A. WIGGINS
Haynes & Boone LLP
Dallas Office
"Stock Option Plans for Non-Executive Employees"
Journal of Financial Economics
WAYNE R. GUAY
University of Pennsylvania
JOHN E. CORE
The Wharton School, University
of Pennsylvania
"Are CEOs Really Paid Like Bureaucrats?"
The Quarterly Journal of Economics,
August 1998
BRIAN J. HALL
Harvard Business School
Negotiations, Organizations
and Markets
National Bureau of Economic
Research (NBER)
JEFFREY B. LIEBMAN
Harvard University, Kennedy
School of Government
National Bureau of Economic
Research (NBER)
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W O R K I N G P A P E R Abstracts
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"Puzzling Stock Options and Compensation Norms"
BY: SAUL LEVMORE
University of Chicago Law School
Document: Available from the SSRN Electronic Paper Collection:
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Paper ID: U Chicago Law & Economics, Olin Working Paper No.
111
Date: December 2000
Contact: SAUL LEVMORE
Email: Mailto:s-levmore@uchicago.edu
Postal: University of Chicago Law School
1111 E.
60th St.
Chicago,
IL 60637 USA
Phone: 773-702-9590
Fax: 773-702-0730
Paper Requests:
Contact Marjorie Holme, Program Administrator and Discussion
Paper Coordinator, Olin Law and Economics Program, University
of
Chicago Law School, 1111 E. 60th Street, Chicago, IL 60637.
Phone:(773)702-0220. Fax:(773)702-0730.
Mailto:mholme@uchicago.edu
ABSTRACT:
Why do so many executives and other employees receive fixed
stock options as part of their compensation packages? There is
an impressive literature on compensatory options, and yet it
raises more puzzles than it solves. Tax law, option theory, and
agency theory all suggest that we might have expected to find
quite different practices than we do observe. In particular,
there is a puzzle in the popularity of conventional fixed
options when indexed options would seem to be relatively
attractive. The solution or story offered here develops
arguments about signaling, in the form of employees'
disinclination to be seen as preferring cash over options in
their own employer's future. It relies on the idea that indexed
options encourage more risk alteration, or inefficient
differentiation, than other forms of compensation. And it
introduces the notion that there is something of a norm in favor
of nonconflicting fortunes within a community. The norm part
of
the argument says something about the more general norm of
privacy with respect to money matters and it illuminates the
occasional practice of confidentiality regarding one's own
compensation. This practice might be stable because of the
negative signals emitted by defectors. The same analysis might
help explain why stock option practices are somewhat sticky.
______________________________
"Employee Stock Ownership Plans: A Status Report"
BY: PAMELA J. PERUN
Urban Institute
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=236837
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Paper ID: The Urban Institute, The Retirement Project, Brief
Series,
No. 10
Date: June 2000
Contact: PAMELA J. PERUN
Email: Mailto:pamela@planetnow.com
Postal: Urban Institute
2100 M.
Street, NW
Washington,
DC 20037 USA
Phone: 202 261-5320
Paper Requests:
All Urban Institute publications (books, policy briefs, etc)
and
Urban Institute Press books may be ordered from: Urban Institute
Press, P.O. Box 7273, Dept. C., Washington, DC 20044
Fax:202-467-5775; Toll-free:877-UIPRESS (847-7377);
Mailto:pubs@ui.urban.org http://newfederalism.urban.org/
ABSTRACT:
For the past 25 years, employee stock ownership plans (ESOPs)
have provided employers with a means to transfer substantial
ownership interests to their employees. But as the popularity
of
company stock as an investment option increases among employees,
employers have some new alternatives to consider. This report
reviews the current status of ESOPs through an analysis of 1997
Form 5500 data collected by the Department of Labor. It also
describes the competition - stock options, stock purchase plans
and company stock funds in 401k plans. It concludes that ESOPs
have lost much of their appeal as companies now have access to
less complicated and more versatile means for aligning employee
and corporate interests. The alternatives to ESOPS also provide
employees with greater choice about how much company stock they
will hold and when they will buy and sell it. The future of
employee ownership does not appear to belong to ESOPs. But ESOPs
still retain special financing and tax benefits particularly
attractive to the small, privately held company. As long as
Congress believes providing tax subsidies for ownership
transfers to employees in such companies is important, ESOPs
will most likely survive for this purpose alone rather than as
a
primary employee benefit.
Keywords: ESOP, employee stock option plan, stock option,
stock purchase, company stock
JEL Classification: J26, J33, K34, J38
______________________________
N E W and F O R T H C O M I N G
Articles
_________________________________________________________________
"Capital Gain v. Ordinary Income and the FICA Tax Treatment of
Employee Stock Purchase Plans"
Tax Lawyer, Vol. 53, No. 3, Spring 2000
BY: KEVIN A. WIGGINS
Haynes & Boone LLP
Dallas Office
Contact: KEVIN A. WIGGINS
Email: Mailto:wigginsk@haynesboone.com
Postal: Haynes & Boone LLP
Dallas
Office
901 Main
St., Suite 3100
Dallas,
TX 75202-3789 USA
Phone: (214) 651-5251
Fax: (214) 200-0733
ABSTRACT:
On July 2, 1999, the Service dropped a bombshell on sponsors
of
employee stock purchase plans ("ESPPs") with the issuance of
Field Service Advice 1999-26034 ("FSA"). The FSA dramatically
changes how amounts received under an ESPP should be treated
for
purposes of the Federal Insurance Contributions Act ("FICA").
The FSA concludes in part that the amount by which the fair
market value of the ESPP stock on the exercise date exceeds the
option price is wages under FICA at the time of the exercise
of
the ESPP option. Prior to this release, the consensus was that
these amounts were not subject to FICA at all.
At the heart of the issue is the distinction drawn by Congress
between items of income characterized as ordinary income and
those characterized as capital gain; a distinction that
implicates many aspects of taxation. Now the distinction enters
the fray of FICA taxation of ESPPs. Even the Service recognizes
the importance of the ordinary income/capital gain dichotomy
in
section 13 of the FSA where it declares that compensatory
amounts, but not proprietary amounts, are subject to FICA.
This Article reviews the statutory language governing ESPPs
and FICA as well as the legislative history of ESPPs and the
relevant case law interpreting FICA, characterizes each element
of income derived from an ESPP, and identifies each element's
proper treatment under FICA. It will be shown that contrary to
the Service's position in the FSA, there are three, not two,
elements of income: the "employer-provided discount," the
"Option Gains," and the "Stock Gains." Each of these elements
is
discussed more fully in Part II, which provides a brief overview
of ESPPs. Part III analyzes the FICA and its applicable case
law. Two theories emerge that potentially support the
proposition that the Option Gains are not subject to FICA. Part
IV summarizes the taxation of stock options in general. Part
V
reviews the legislative history of ESPPs as well as the
historical and current taxation of stock options to identify
the
proper characterization of each element of income derived from
an ESPP option. Part VI applies the two theories developed in
Part III to the findings set forth in Part V and concludes that
only the employer-provided discount (or, if lower, the excess
of
the fair market value of the stock at the time of the
disposition or the employee's death over the exercise price)
should be subject to FICA.
______________________________
"Stock Option Plans for Non-Executive Employees"
Journal of Financial Economics
BY: WAYNE R. GUAY
University of Pennsylvania
JOHN E.
CORE
The Wharton School, University of Pennsylvania
Contact: WAYNE R. GUAY
Email: Mailto:guay@wharton.upenn.edu
Postal: University of Pennsylvania
Wharton
School
2400 Steinberg-Dietrich
Hall
Philadelphia,
PA 19104 USA
Phone: 215-898-7775
Fax: 215-573-2054
Co-Auth: JOHN E. CORE
Email: Mailto:jcore@wharton.upenn.edu
Postal: The Wharton School, University of Pennsylvania
Accounting
Department
3720 Locust
Walk
Philadelphia,
PA 19104 USA
ABSTRACT:
We examine determinants of non-executive employee stock options
outstanding, grants, and exercises for 756 firms during 1994
to
1997. We find that firms use greater stock option compensation
when facing capital requirements and financing constraints. Our
results are also consistent with firms using options to attract
certain types of employees, provide retention incentives, and
create incentives to increase firm value. After controlling for
economic determinants and stock returns, option exercises are
greater (less) when the firm's stock price hits 52-week highs
(lows), which confirms in a broad sample the psychological bias
documented by Heath, Huddart, and Lang (1999).
Keywords: Employee stock options; Compensation; Equity
incentives
JEL Classification: G32, J33, J41
______________________________
"Are CEOs Really Paid Like Bureaucrats?"
The Quarterly Journal of Economics,
August 1998
BY: BRIAN J. HALL
Harvard Business School
Negotiations, Organizations and Markets
National Bureau of Economic Research (NBER)
JEFFREY
B. LIEBMAN
Harvard University, Kennedy School of Government
National Bureau of Economic Research (NBER)
Paper ID: Harvard Institute of Economic Research Paper No. 1789
Date: 1997
Contact: BRIAN J. HALL
Email: Mailto:bhall@hbs.edu
Postal: Harvard Business School
Negotiations,
Organizations and Markets
Baker
185
Soldiers
Field Road
Boston,
MA 02163 USA
Phone: 617-495-5062
Fax: 617-496-4191
Co-Auth: JEFFREY B. LIEBMAN
Email: Mailto:jeffrey_liebman@harvard.edu
Postal: Harvard University, Kennedy School of Government
79 John
F. Kennedy Street
Cambridge,
MA 02138 USA
ABSTRACT:
A common view is that there is little correlation between firm
performance and CEO pay. Using a new 15-year panel data set of
CEOs in the largest publicly traded U.S. companies, we document
a strong relationship between firm performance and CEO
compensation. This relationship is generated almost entirely
by
changes in the value of CEO holdings of stock and stock options.
In addition, we show that both the level of CEO compensation
and
the sensitivity of compensation to firm performance have risen
dramatically since 1980, largely because of increases in stock
option grants.