Corporate Meltdowns Caused by Compensatory Stock Options

Calvin H. Johnson (Texas) has published Corporate Meltdowns Caused by Compensatory Stock Options, 131 Tax Notes 737 (May 16, 2011). 


Tax contributes to high-risk investments that cause meltdowns when the high risk turns into losses. This proposal would end the exemption of compensatory stock options from the § 162(m) $1 million limit on compensation deductions. A CEO with stock options has an incentive to increase the volatility of corporate assets, because an option holder participates in gains but does not share in the losses from volatile corporate assets. However, high-risk investments hurt outside parties when they collapse. In some cases, the government has had to pay bailouts to prevent further economic meltdown. It is far better not to induce high risk in the first place.

This proposal is the second of a two-part series on the contribution of tax to corporate meltdowns. The first proposal was published as Corporate Meltdowns and the Deduction of Credit-Risk Interest, 131 Tax Notes 513 (May 2, 2011).

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