Title: The Non-Option: Understanding the Dearth of Discounted Employee Stock Options
Abstract: Contemporaneous grants of both stock and at-the-money options to individual employees of U.S. public companies indicates demand for equity compensation packages that are in the money, i.e., packages of equity pay instruments that in aggregate have payoff profiles and incentive properties that are similar to explicit in-the-money employee stock options. However, several tax rules (and formerly accounting rules) strongly discourage grants of explicit in-the-money options, including recently enacted IRC - 409A, which essentially precludes the use of explicitly discounted options by taxing these instruments at vesting, rather than at exercise, and adding a 20% penalty tax. This article explores whether the tax and accounting distinction between discounted and non-discounted options makes sense.