The tax treatment of employee stock options : generous to a fault

In the 2000 budgets, both the federal and Ontario governments introduced changes to the tax treatment of employee stock options for the explicit purpose of making their tax treatment in Canada similar to or more favourable than that in the United States. The federal budget added a deferral, similar to that currently applicable to options granted by Canadian-controlled private corporations, for up to $100,000 per year of public company stock options. The Ontario budget introduced an exemption from tax for employees involved in research and development on the first $100,000 per year of employee benefits arising on the exercise of qualified stock options or on eligible capital gains arising from the sale of shares acquired by the exercise of eligible stock options. These proposals reflect the apparent acceptance by the two governments that there is a “brain drain” from Canada to the United States of knowledge workers in the “new” economy and that reductions in Canadian taxes should stem this drain. In the author’s view, the tax treatment of employee stock options, even without these changes, is overly generous. Both the federal and provincial proposals ignore the fact that most employee stock options are taxed more favourably in Canada than in the United States in any event. In particular, most employee stock option benefits in Canada are taxed at capital gains tax rates, whereas in the United States most are taxed at full rates. While the US Internal Revenue Code does provide capital gains tax treatment for certain employee stock option benefits, a number of preconditions must be met. Most important, the shares acquired pursuant to the options must be held for a minimum of one year after the option is exercised. In addition, there are monetary limits on the amount of options that qualify for capital gains treatment. In Canada, there are generally no holding period requirements or monetary limits that apply in order for the option holder to benefit from capital gains tax rates. Empirical evidence indicates that the vast majority of employees in the United States exercise their options and immediately sell the shares acquired. These “cashless exercises” do not benefit from capital gains treatment in the United States, whereas similar cashless exercises in Canada generally do. This empirical evidence suggests not only that the 2000 budget proposals are unwarranted, but also that the existing treatment of employee stock options in Canada is already more generous than that in the United States. This article begins with a theoretical “benchmark” for the taxation of employee stock options. The author suggests that employee stock options should be treated in the same manner as other income from employment. In theory, the value of the benefit should be included in income when the option is granted or vests. However, owing to the practical difficulty of valuing employee stock options, the theoretical benchmark proposed is that the value of the benefit (the difference between the fair market value of the shares acquired and the strike price under the option) be taxed when the shares are acquired, and the employer be entitled to a corresponding deduction. The employee stock option rules in Canada and the United States are then compared and contrasted with each other and the benchmark treatment. The article then examines the arguments that have been made for favourable treatment of employee stock options. Included in this critique is a review of the recent empirical work on the Canadian brain drain. Empirical studies suggest that the brain drain—if it exists at all—is small and that, despite what many newspapers and right-wing think-tanks would have us believe, lower taxes in the United States are not the cause. One study, concluding that taxes do have an effect on migration, suggests that even if Canada adopted a tax system identical to that in the United States, the brain drain would be reduced by a mere 10 percent. Indeed, even if Canada eliminated income tax altogether, it would not stop the brain drain. If governments here want to spend money in order to stem the brain drain, they should focus on other areas. For example, Canada produces fewer university graduates in the fields of mathematics, sciences, and engineering than any other G7 country except Italy. The short supply of university graduates in these fields, the apparent loss of top-calibre academics to US
universities, and the consequent lower levels of university research in these areas (an important spawning ground for new ideas in the “new” knowledge-based economy) suggest that Canada may be better served by devoting more resources to its university institutions, particularly in post-graduate programs, rather than continuing the current trend of budget cuts that universities have endured and may further endure if taxes are reduced.
As far as employee stock options are concerned, if Canada does want to look to the United States for guidance on tax reform (which it seems to do with increasing frequency of late), it should adopt the US rules applicable to nonstatutory options, which are close to the proposed benchmark treatment. In the absence of preferential tax treatment, employee stock options would still be included in compensation packages provided that there were sound business reasons for their use. No persuasive evidence has been put forward that the use of stock options, in the absence of tax incentives, is suboptimal. Indeed, the US experience suggests quite the opposite.

Factors that influence employer decisions in hiring and retaining an employee with a disability

This paper is based on results of a national study in Australia. Questionnaires were completed by 643 employers, each of whom had employed a person with a disability between 1996--1998. Employers rated the importance of several factors relevant to decisions to hire and retain a person with a disability. Individual factors were rated most important, with grooming/hygiene and work-performance factors rated highest. Management factors and cost factors were rated moderately important. Social factors were rated least important. Analyses of variance were conducted, identifying several employer differences in ratings. The paper discusses employer values as well as the need to include employers in a partnership approach.

The use of correspondence analysis to develop a scale to measure workplace morale from multi-level data

This paper focuses on the issue of comparing social groups or collectivities using measures derived from individual-level multivariate data. In this case, groups need to be differentiated such that: (a) between-group differences are maximized; (b) within-group differences are minimised; and (c) `differences' are calibrated to a scale that reflects a set indicators or observed variables.This paper demonstrates empirically how correspondence analysis can achieve this. It presents a scale of `workplace morale' derived from the responses of employees in a large sample of workplaces to questions concerning satisfaction with various facets of their job and their workplace. The scale derived through correspondence analysis is shown to achieve the three criteria described above.

Benefits of employee training program : implications for the insurance industry

The decision to commit to the cost of training employees in insurance
organisations of all sizes is similar in nature to the decision by their customers to buy insurance. Both believe it is necessary but each has some reservations about its benefits.

Towards a multicultural world : identifying work systems, practices and employee attitudes that embrace diversity

The research program described focuses on identifying the role of organisational culture, as reflected in workplace systems and practices, and employee and group attitudes in the outcomes of interactions among dissimilar parties. A systematic, theory-testing approach underlies the program, which aims to both develop and validate the diversity openness construct. The Perceived Dissimilarity-Openness Moderator Model developed from the research asserts that the affective, cognitive and behavioural consequences of diversity depend in part upon the perception of difference and subsequent quality and magnitude of the response to the perceived dissimilarity. When individuals or social systems (groups or organisations) are diversity-closed, outcomes are predicted to be less positive than when they are diversity-open.

Which work characteristics predict employee outcomes for the public-sector employee? An examination of generic and occupation-specific characteristics

The wide-ranging changes that have occurred in the public sector over recent years have placed increasing demands on public-sector employees. A survey of employees within a relatively commercially-oriented public-sector organization in Australia was used to test a demand-oriented generic model of employee well-being and a variety of situation-specific variables. The presence of support at work and the amount of control an employee had over their job were found to be key predictors of employee-level outcomes. Perceptions of pay and the perception of a lack of human resources (HR) were also found to predict employee outcome variables. The results emphasize the impact that middle managers and HR managers can have in terms of reducing the detrimental employee effects that can be caused by the introduction of new public management (NPM) and the potential for a positive impact on employees. In particular, public-sector managers can use the design of jobs and the development of social support mechanisms, such as employee assistance programmes, to maintain, if not improve, the quality of working life experienced by their employees. More broadly, this study has found that the job strain model is a useful tool in a public-sector environment and is likely to be of increasing utility with the continuing introduction or consolidation of NPM over time. Managing these issues in the new public sector could be a key means of protecting the key resource of the Australian public sector - the employees.

Organizational change in the public sector: augmenting the demand control model to predict employee outcomes under New Public Management

This study identifies the environmental and personal characteristics that predict employee outcomes within an Australian public sector organization that had, under New Public Management (NPM), implemented a variety of practices traditionally found in the private sector. These are more results-oriented, and their adoption can be accompanied by increased strain for employees. The current investigation was guided by two complementary theories, the Demand Control Support (DCS) model and Conservation of Resources (COR) theory, and sought to examine the benefits of building on the DCS to include both situation-specific stressors and internal coping resources. Survey responses from 1,155 employees were analysed. The hierarchical regression analyses indicated that both external and employee-centred variables made significant contributions to variations in psychological health, job satisfaction, and organizational commitment. The external resources, work based support and, to a lesser extent, job control, predicted relatively large proportions of the variance in the target variables. The situation-specific stressors, particularly those involving harmful management practices (e.g., insufficient time to do job as well as you would like, lack of recognition for good work), made significant contributions to the outcome measures and generally supported the process of augmenting the generic components of the DCS with more situation-specific variables. In terms of internal resources, problem and emotion-based coping improved the capacity of the model to predict psychological health. The results suggest that the impact of NPM can be ameliorated by incorporating the dimensions of the augmented DCS and coping resources into the change programme.

Work characteristics and employee outcomes in local government

The overall objective of this study was to examine the work characteristics that make significant contributions to extra-role performance (as measured by the helping dimension of citizenship behaviour) and employee wellbeing (measured by job satisfaction and psychological health) in a local government. The work characteristics examined were based on the demand-control-support (DCS) model, augmented by organization-specific characteristics. The results indicate that characteristics described in the core DCS are just as relevant to extra-role performance as they are to more traditional indicators of job stress. Although the more situation-specific conditions were not predictive of citizenship behaviour, they made unique contributions to job satisfaction

Portable sick leave in the Victorian building industry : managing cumulative employee benefits in the absence of employment security

The trend away from full-time permanent employment raises questions about the relevance of traditional approaches to managing and compensating employees. Employment in the Australian building industry is characterised by short-term, project-based employment. Employers and unions in the industry have adopted alternative compensation models to accommodate the short-term nature of employment, most notably through portable benefit schemes. In 1997, the Victorian building industry extended the range of portable benefits to include sick leave. Empirical evidence suggests a relationship between employee absence behaviour and accrual entitlement models. Research reported here supports this link, and suggests that both employers and employees can benefit from an alternative, portable, approach to accrued entitlements. Employers can benefit because employees may be less likely to take an instrumental approach to their entitlements. Employees benefit because they are able to accrue entitlements for the period they remain in the building industry, irrespective of the extent to which they change jobs.

A set of patterns for the web-based interfaces of an employee services system

The provision of Human Resource (HR), especially payroll, is a core function in every organization. Previously, providers of HR/payroll have offered their services to their clients via conventional modes of communication, such as telephones, facsimile, and courier services. In recent years, with the advent of the Internet and the emergence of web-based electronic commerce, there has been a rise in the adoption of web-based technology and information
systems by service providers, thereby enabling them to interact with their clients through this medium. This development necessitates the use of web-based user interfaces as workspaces between the HR/payroll providers and their clients, and thus, raises certain concerns that determine the effectiveness of web-based workflow systems. These concerns, related to the use of web interfaces, form the basis of the patterns discussed in this paper

Employee development strategies in the B2C banking environment: two Australian case studies

The implementation of technology and, in particular, eCommerce technologies has had unforeseen consequences for the relationship between managers and employees. To be able to operate in an increasingly global and competitive environment, retail banks have had to develop new ways of dealing with their employees. Issues have arisen that have necessitated a rethink in the way employees interact with customers and this, in turn, has required changes to human resource strategies. The question we address in this paper is what are the employee capabilities and qualities retail banks must develop to satisfy both more sophisticated customers (who demand flexibility of interactions, responsiveness and convenience) as well as the organisation’s own needs (including expanded sales opportunities, cost containment or reduction and customer loyalty) when implementing eCommerce technologies. The paper discusses two case studies illustrating some of the issues with which banks, as service organisations, have had to deal. These two banks have taken rather different approaches in their use of technology to interact with their customers and this has implications for the way they manage their employees who deal with those customers.

The impact of the adoption of IAS 19 employee benefits on annual financial statements: an examination of Australian and United Kingdom companies

International Financial Reporting Standards (IFRS) have been adopted by a number of countries as a means of harmonising financial statements around the world. Proponents of IFRS suggest many benefits upon their adoption. This paper examines the effect of the adoption of IFRS on aspects of the company's financial statements, in particular, the adoption of the IFRS relating to post employment benefits and its effects on debt/equity ratios.

This study compared the reporting practices of a number of Australian and UK companies and found that for most companies there was a substantial increase in liabilities, a decrease in shareholders' equity and a corresponding increase in debt/equity ratios after the IFRS were adopted.