All else equal, a company with a current marginal tax rate of 10% and an expected future tax rate of 21% will prefer to offer employees deferred compensation.

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The maximum compensation expense for financial reporting purposes related to equity-settled compensation equals the value of the award when it becomes taxable to the employee.

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The maximum compensation expense for tax purposes related to equity-settled compensation equals the value of the award when it becomes taxable to the employee.

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Actual tax benefits realized in excess of those recognized when stock compensation expense is recognized for financial reporting purposes reduce reported financial reporting tax expense. When this happens, effective tax rates are lower than statutory tax rates.

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Average tax rates are a measure of the tax burden borne by individuals. These measures only imperfectly capture individuals tax burdens because they do not reflect implicit taxes paid via foregone pretax returns. This is one reason why high income individuals average tax rates often appear quite low.

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