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
Date Written: March 16, 2020
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 The “Tax Cuts and Jobs Act” (TCJA) repealed a long-standing exception that allowed publicly traded companies to deduct executives’ qualified performance-based compensation (e.g., stock options) in excess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.
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