e stock price. Of course, the CEO does not directly control the trading price of the stock, but stock options are based on the assumption that the market will drive up the price of stocks of companies that are doing well (Greene 23).
The income tax effect of stock options is one of the areas that have gained much attention as the popularity of options has increased. Since 1917, the maximum marginal personal tax rate rose to 25 percent in the late 1920s, but increased to 91 percent in the post-World War II period (Long 12). As a result, the incentive to avoid excessive taxation increased, as well. Issuing stock options to chief executives was one way to minimize taxation since the profits from stock options were considered capital gains, taxed at a lower rate than regular income. While companies stated that options were granted to increase the manager's interest in the company and thus serve as a strong incentive for better performance, the tax issue was considered to be a prime motivator, as well (Conte & Kruse 92).
Until late 2003, equity-compensation programs (so-called because the stock represents an equity position in the company) require that proxy disclosures be made to shareholders, that accounting charges be appropriately documented, and that the tax ramifications be clearly understood and balanced with the need to reward executives for creating shareholder wealth. Under these rules--implemented in 1994--the Financial Accounting Standards Board (FASB) required that companies provide pro forma accounting statements only in annual statements showing the effect of stock options. However, these statements were presented as part of the company's "official" financial statements. Initially, the FASB proposed at that time that companies expense options, but under pressure from Congress, the FASB only implemented the disclosure requirement. According to some analysts, these disclosures essentially recorded the stock option...