EXCERPTS:
Canada's 100 highest paid corporate executives are sitting on $2 billion worth of stock options, much of its value under-reported and all of it qualifying for beneficial tax treatment, a new study says
Though perfectly legal, the practice of granting some portion of executive pay in the form of stock options has become highly controversial, partly because they have been a factor in the soaring value of executive pay.
But also because they encourage corporate chiefs to manage their companies for the benefit of shareholders at the expense of customers and employees, the report by the Canadian Centre for Policy Alternatives says.
"Executive bonuses, especially in the form of stock and option grants - represent the most prominent form of legal corruption that has been undermining our large corporations and bringing down the global economy," the report says, quoting Henry Mintzberg, a management professor at McGill University's Desautels Faculty of Management.
Stock options are a problem for another reason, says the policy centre's report released Tuesday. For tax purposes, they're treated as dividend income, which means they're taxed on half their value.
The cost of that tax break on $2 billion worth of stock options amounts to roughly $475 million, says the report, called Canada's CEO Elite 100. That's a tax subsidy to the richest 1 per cent of income earners from the other 99 per cent, the report observes.
Another issue with stock options is the current method of calculating their value tends to understate their future worth, the report says.
For example, in 2008 Canada's five biggest banks estimated the future value of the stock options granted to the CEOs that year as $12.2 million. But the actual value of those stock options two years later was $28.4 million, the report notes.
Stock options work like this: When a company grants stock options to an executive, it's giving him or her the right to buy a given number of shares at a pre-determined price, usually the shares' market value on the day the option is granted.
The executive can't buy those shares at that price until some future date, usually two or three years hence. If the shares have risen in value by then, the executive can exercise his or her option to buy them from the company and then immediately sell them into the market for a profit.
If the shares fall in value after being granted, the executive can simply opt not to exercise the option to buy, thus incurring no financial risk, the report notes.
The report recommends the government tax stock options the same way as other forms of earned income.
-reprinted from the Toronto Star