The Taxation of Bonuses and its Effect on Executive Compensation and Risk‐Taking: Evidence from the UK Experience

20 Pages Posted: 21 Aug 2017

See all articles by Maximilian von Ehrlich

Maximilian von Ehrlich

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES)

Doina Radulescu

University of Bern

Date Written: Fall 2017

Abstract

This paper explores the effects of a bonus tax adopted in the UK in December 2009 on the compensation structure of executives and on risk‐taking behavior in the financial sector. Excessive bonuses are blamed for encouraging risk taking and are regarded as one of the pull factors of the financial crisis. The British government attempted to reduce bonuses and accordingly bank risk taking by means of a special tax on cash‐based bonuses. Using a comprehensive dataset on executive compensation, we show that the introduction of the bonus tax decreased the net cash bonuses awarded to directors by about 40%, accompanied, however, by a simultaneous increases in other forms of pay leaving total compensation as well as risk levels unaffected.

Suggested Citation

von Ehrlich, Maximilian and Radulescu, Doina, The Taxation of Bonuses and its Effect on Executive Compensation and Risk‐Taking: Evidence from the UK Experience (Fall 2017). Journal of Economics & Management Strategy, Vol. 26, Issue 3, pp. 712-731, 2017, Available at SSRN: https://ssrn.com/abstract=3021395 or http://dx.doi.org/10.1111/jems.12203

Maximilian Von Ehrlich (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, 80539
Germany

Doina Radulescu

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

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