Do Corporate Taxes Affect Executive Compensation?

The limitation of executive compensation has been a matter of public and policy debate for
at least 20 years. We examine a regulatory action in Austria in 2014 where the tax
deductibility of the total value of executive compensation is unavoidably limited. We find
no average effects on the growth or composition of executives’ pay. However, the
deductibility limit affects the managers of firms with low bargaining power and of firms
with strong corporate governance, indicating that they are affected by the deductibility
limit. Additionally, the contract durations for executives decrease after renegotiation. We
further find that affected firms experience cuts in investment and research and
development, suggesting that shareholders bear part of the economic burden. Our results
indicate that the effectiveness of other reforms, such as the Tax Cuts and Jobs Act of 2017,
in restricting executive pay is rather limited.

Keywords: Corporate taxes; tax incidence; executive compensation

JEL Classification: J33, H21, H22, M12

Suggested Citation: Suggested Citation

Bornemann, Tobias and Jacob, Martin and Sailer, Mariana, Do Corporate Taxes Affect Executive Compensation? (March 9, 2022). WU International Taxation Research Paper Series No. 2020-09, Available at SSRN: https://ssrn.com/abstract=3403486 or http://dx.doi.org/10.2139/ssrn.3403486