Examining the Immediate Effects of Recent Tax Law Changes on the Structure of Executive Compensation
51 Pages Posted: 17 Jun 2019 Last revised: 28 Sep 2019
Date Written: September 26, 2019
We exploit a December 22, 2017 law change to examine the relation between corporate taxes and executive compensation. The so-called “Tax Cuts and Jobs Act” (TCJA) repealed a long-standing exception that allowed publicly-traded companies to deduct executives’ qualified performance-based compensation (e.g., stock options) in excess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 firms impacted by the TCJA in their 2018 fiscal years changed total compensation, compensation mix, or pay-performance sensitivity relative to control firms that are not subject to the new regime until their 2019 fiscal years. These findings suggest the tax benefits of deductible executive compensation decisions do not outweigh non-tax considerations when structuring pay.
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