In the NL. recipients have to pay income tax on stock options as soon as they are bestowed. But intense competition from option-rich firms abroad are starting to change that climate.

To Juan Villalonga, the arrangement must have seemed fair enough. Shortly after taking over as head of the Spanish telecommunications firm Telefonica in February 1997, he awarded the company’s 100 top executives–including himself–a bushel of potentially lucrative stock options that could be cashed out after three years. With…