Download This PaperHow Executive Compensation Changes In Response to Personal Income Tax Shocks (Who Pays the CEO’s Income Taxes?)
78 Pages Posted: 19 Mar 2020 Last revised: 22 Apr 2026
Date Written: July 29, 2020
Abstract
US CEOs receive an abnormal increase in pay of 6.4% to 7.4% following large state personal income tax increases. The pay increase substantially compensates the CEO for the increased tax liability. The increase in pay is larger when: the CEO has more employment options, is less tied to the company, or corporate governance is doubtful. Reflecting CEO outside options, the CEO’s supply curve for managerial input is far more elastic than the firm’s demand curve. Indicating agency concerns, CEOs do not experience an abnormal pay cut following a tax decrease.
Keywords: Executive compensation, Personal income tax
JEL Classification: H24, H71, J33, M12
Suggested Citation: Suggested Citation
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