Comments on: ISS on Option Timing

By: Vic Fleischer

Vic Fleischer — Wed, 19 Jul 2006 15:18:33 +0000

Bill — 162(m) has been interpreted in a way that equates performance-based with a rise in stock price. In-the-money options are not treated as performance based because they would have value even if the stock price declined a bit. Backdated options are the functional equivalent of in the money options. Spring-loaded options are at best a closer case.

Mind you, I’m not defending the way that the tax code draws a silly line between in the money and at the money options. It should all be deductible.

And yes, only companies with a positive marginal tax rate will care. Some tech companies don’t; I wonder if this helps explain the pattern of backdating.

By: Abnormal Returns » Blog Archive » Options overload

Abnormal Returns » Blog Archive » Options overload — Wed, 19 Jul 2006 15:10:30 +0000

[...] Bill Sjostrom at Truth on the Market points to an ISS white paper that is both an overview of the topic and provides corporate boards with recommendations on “best practices for option grants.” [...]

By: Bill Sjostrom

Bill Sjostrom — Tue, 18 Jul 2006 23:56:45 +0000

Vic:

I’m not aware of any authority either way on spring-loaded options. Why do you think it seems like an aggressive stance (it may very well be, but since you are the tax expert I was hoping you could elaborate)?

Also, wouldn’t the full brunt of the 35% penalty generally only apply to companies that have sufficient taxable income in the year of grant to take advantage of the deduction?

By: Vic Fleischer

Vic Fleischer — Tue, 18 Jul 2006 23:08:55 +0000

Bill — Just as a side note, the efficiency argument falls apart if you lose the tax deduction under 162(m), and possibly run afoul of 409A. Is there authority out there saying that spring-loaded options are still performance-based for purposes of 162(m)? It seems like an aggressive stance.

I certainly agree that tying a comp committee’s hands could appear to be inefficient for companies that don’t have an investor confidence issue. But if the tax code has already imposed a 35% penalty on in-the-money and effectively in-the-money options, then the ISS proposals do seem sensible.

By: Steven Donegal

Steven Donegal — Tue, 18 Jul 2006 20:23:01 +0000

I’m surprised ISS didn’t announce its preferred position that all options be granted at the high stock price in the year of grant. I heard they were considering recommending pricing at the high price during the vesting period, but thought that might not provide the proper incentives.