Examining the Immediate Effects of Recent Tax Law Changes on the Structure of Executive Compensation

44 Pages Posted: 17 Jun 2019 Last revised: 18 Mar 2020

See all articles by Lisa De Simone

Lisa De Simone

Stanford Graduate School of Business

Charles McClure

University of Chicago Booth School of Business

Bridget Stomberg

Indiana University - Kelley School of Business

Date Written: March 16, 2020

Abstract

We exploit a recent law change to examine the relation between corporate taxes and executive compensation. The “Tax Cuts and Jobs Act” (TCJA) repealed a long-standing exception that allowed publicly traded companies to deduct executives’ qualified performance-based compensation (e.g., stock options) in excess of $1 million. The new regime is effective for tax years beginning after December 31, 2017, and limits total deductible compensation to $1 million for each covered executive. Using a difference-in-differences design to examine executive compensation paid in fiscal years 2017 and 2018, we find no evidence that the average firm affected by the TCJA in their 2018 fiscal years changed total compensation or compensation mix relative to control firms not subject to the new regime until their 2019 fiscal years. We find limited evidence of a reduction in total compensation among less than 10 percent of treated firms. We execute a battery of tests to validate these results. Overall, our findings suggest the tax benefits of executive compensation do not outweigh non-tax considerations when firms structure pay and cast doubt on whether tax regulation can successfully address the income inequality that arises from high levels of executive pay.

Suggested Citation

De Simone, Lisa and McClure, Charles and Stomberg, Bridget, Examining the Immediate Effects of Recent Tax Law Changes on the Structure of Executive Compensation (March 16, 2020). Kelley School of Business Research Paper No. 19-28. Available at SSRN: https://ssrn.com/abstract=3400877 or http://dx.doi.org/10.2139/ssrn.3400877

Lisa De Simone

Stanford Graduate School of Business ( email )

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Stanford, CA 94305-5015
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HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/lisa-de-simone

Charles McClure

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Bridget Stomberg (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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