FEI's Washington Update.

• Position: Financial Executives Institute - Brief Article

"Super Stock Options" Legislation Would Provide Tax Benefits

Touted as an important reason for increased corporate productivity and the wildly successful growth of the market, employee stock options have been a key to the success of the new economy. Further, options are perceived as enabling everyday workers to feel like rightful stakeholders in their company. Unfortunately, though, the present treatment of stock options under tax law dilutes their value to the worker as a long-term incentive.

Most corporate stock programs provide non-statutory stock options (NSOs). Employers prefer NSOs because they receive a tax deduction when their workers exercise the option. But there's a problem. When workers exercise their options, they're required to pay taxes on the profit -- the difference between the option price and the stock price -- and the tax is levied at ordinary income rates, not at lower capital gains rates. In most cases, workers are forced to sell their stocks to cover the tax liability.

But not all stock options present this burden to employees. In particular, incentive stock options (ISOs), often used to compensate executives, avoid the tax consequences of NSOs. Under an ISO, an employee is taxed on the sale of the shares, not on the exercise of the option. If the option is exercised more than two years after the worker is issued it, the resulting profit is taxed as a long-term capital gain.

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