&gt; Why were employees paying tax on the nominal value of the shares?<p>Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options.<p>&gt; Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?<p>Yes, but this requires the employee to pre-pay for the shares when they are issued.<p>Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.