Tax Risks of Equity-Based Compensation

Summary

This practice note provides an overview of certain tax issues associated with grants of equity-based compensation. The desire to attract and retain key employees is an enduring objective of most businesses, whether publicly traded or private. While some employees may value bringing their dog to work, free fitness classes, or organic home-cooked meals twice a day, there is no more favored employee benefit than an offer of equity ownership. Too often, however, both employers and their employees fail to fully appreciate the tax risks of equity-linked compensation. The following discussion reviews the relevant tax treatment and highlights key tax-related considerations for executive compensation attorneys to address with their corporate clients who offer equity to their employees and with their executive clients who may receive equity grants as part of their total compensation package.