Organizational Form, Taxes, Ownership, and CEO Compensation: Evidence from Small Businesses

Abstract

This study examines the determinants of CEO compensation using data from a nationally representative sample of non-publicly traded corporations. We find that CEO compensation is higher at C corporations than at S corporations, consistent with view that CEOs of small firms can reduce the effect of double taxation by distributing profits via tax-deductible compensation expense. We also find that CEO compensation increases at a decreasing rate with CEO stock ownership; increases with the firm’s capitalization as measured by the ratio of equity to assets; and increases with firm size as measured by annual sales or total employment. Finally, we find that there are significant differences in CEO compensation across industrial classifications.

Keywords: business taxes, CEO pay, corporation, executive compensation, organizational form, ownership, personal taxes, privately held, SSBF

JEL Classification: H24, H25, G32, J33