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

50 Pages Posted: 17 Jun 2019 Last revised: 30 Jul 2020

See all articles by Lisa De Simone

Lisa De Simone

University of Texas at Austin

Charles McClure

University of Chicago Booth School of Business

Bridget Stomberg

Indiana University - Kelley School of Business

Date Written: July 29, 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 The “Tax Cuts and Jobs Act” (TCJA) lowered the corporate tax rate from 35 to 21 percent and repealed a long-standing exception that allowed companies to deduct executives’ qualified performance-based compensation in excess of $1 million. These changes are effective for tax years beginning after December 31, 2017. Using a difference-in-differences design, we find no evidence that the average firm affected by the TCJA in their 2018 fiscal years changed compensation 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.

Keywords: taxes, executive compensation, TCJA

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 (July 29, 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

University of Texas at Austin ( email )

2110 SPEEDWAY
Stop B6400
Austin, TX 78705
United States

HOME PAGE: http://www.lisa-desimone.com

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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