Deferred compensation;

              Deferred Compensation
BY PRESLEY FORD, JR. PARTNER, TULSA OFFICE
Presented before the Oklahoma Tax Accounting Conference, University of Oklahoma, Norman, Okla. — November, 1955
The heavy impact of income taxes on compensation for personal services in recent years has led business men to seek ways and means of increasing income remaining after taxes for their key employees and executives. Like almost all other tax savings plans, deferred compen­sation
plans seek to minimize the tax load in one of two ways, which are as follows:
1. By avoiding the bunching of earnings in a relatively short period of years and by spreading the compensation over a longer period, thereby bringing the annual earnings into lower surtax brackets; or
2. By converting some portion of the employee's reward for his services into capital gains.
The Internal Revenue Code of 1954 contains a subchapter relating to deferred compensation (Chapter 1, Subchapter D). The sections con­tained
in this subchapter relate to two general types of deferred com­pensation
plans: (1) pension, profit-sharing and stock bonus plans, and (2) employee stock option plans.
Your program committee has asked that I give special emphasis in my remarks to employee stock options, so let us begin with a consid­eration
of this type of deferred compensation plan.
EMPLOYEE STOCK OPTIONS Granting stock options to key employees is a widely used form of deferred compensation. From the standpoint of the employer, a stock option plan is attractive because it encourages key employees to acquire a financial interest in the business and provides them with an added in­centive
to work for the improvement of the business so that the value of their investment may be increased. From the standpoint of the em­ployee,
a stock option plan is most attractive if no tax is incurred at date of grant or exercise and if the full tax benefits of long-term capital gains are obtained upon sale of the stock.
At the present time, the tax practitioner must distinguish between two general types of stock options. On the one hand, there is the res-
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