Employer Losses and Deferred Compensation

42 Pages Posted: 1 Aug 2019

Date Written: July 2019


Most large public companies offer their executives the opportunity to defer the receipt and taxation of their salary or other current compensation until retirement or some other future date, and equity compensation, which also entails deferral of pay and taxation, constitutes a large fraction of the typical executive pay package. Conventional wisdom holds that employer net operating losses (NOLs) improve the joint economics of deferred and equity compensation (henceforth together "deferred compensation") for the parties. However, empirical studies provide little evidence of an association between employer NOLs and deferred compensation use. This paper focuses on two potential explanations for this apparent disconnect. First, this paper shows that the relationship between employer NOLs and the attractiveness of deferred compensation is more complex and less predictable than is generally recognized, that a large NOL position does not necessarily produce a larger driving force for use of deferred compensation, and that in some cases employer NOLs can actually result in poorer deferred compensation economics. As a result, some employers and executives may rationally choose to ignore employer NOLs when making compensation decisions. Second, even if companies are sensitive to the existence of employer NOLs when making compensation decisions, it is not clear that research methods currently in use would detect the sensitivity. The commonly used proxies and simulations of employer effective marginal tax rates that have been employed in these studies may not adequately capture the complexity of the relationship between NOLs and the economics of deferred compensation.

Keywords: nonqualified deferred compensation, executive compensation, equity compensation, net operating losses, NOLs

JEL Classification: G34, H24, H25, J33, K34, M52

Suggested Citation

Walker, David I., Employer Losses and Deferred Compensation (July 2019). Boston Univ. School of Law, Law and Economics Research Paper No. 19-13, Available at SSRN: https://ssrn.com/abstract=3429803 or http://dx.doi.org/10.2139/ssrn.3429803

David I. Walker (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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