The Impact of CEOs on Changes to Executive Compensation After the TCJA: Initial Evidence

56 Pages Posted: 19 Sep 2019 Last revised: 9 Jul 2020

See all articles by LeAnn Luna

LeAnn Luna

University of Tennessee, Knoxville - College of Business Administration - Center for Business and Economic Research

Kathleen Schuchard

University of Tennessee, Knoxville

Danielle Stanley

University of Tennessee, Knoxville

Date Written: June 30, 2020

Abstract

The 2017 Tax Cuts and Jobs Act (TCJA) expanded the impact of IRC Section 162(m) by disallowing deductions for any compensation over $1 million paid to top executives. Under prior law, qualified performance-based pay was exempt from the $1 million cap. We examine whether TCJA affected firms’ CEO compensation decisions in the first year following enactment. Using a difference-in-difference design, we find little evidence that CEO salaries increase more at tax-sensitive firms in the year after the TCJA. We also find that the change in total compensation is not different between our treatment and control groups. Additional analyses using different definitions of treatment and control groups confirm these results. We also examine whether firms’ reactions to the TCJA vary based on CEO strength and broader corporate governance measures. We find that weaker CEOs with little influence over the board or compensation committee members received smaller increases to compensation after TCJA, but changes to executive compensation do not vary with broader corporate governance measures. Taken together, our results provide a first glimpse of firms’ changes to CEO compensation after the TCJA.

Keywords: tax reform, executive compensation, corporate governance

JEL Classification: G30, H25

Suggested Citation

Luna, LeAnn and Schuchard, Kathleen and Stanley, Danielle, The Impact of CEOs on Changes to Executive Compensation After the TCJA: Initial Evidence (June 30, 2020). Available at SSRN: https://ssrn.com/abstract=3451998 or http://dx.doi.org/10.2139/ssrn.3451998

LeAnn Luna (Contact Author)

University of Tennessee, Knoxville - College of Business Administration - Center for Business and Economic Research ( email )

711 Stokely Management Center
Knoxville, TN 37996-4334
United States
865-974-6080 (Phone)
865-974-3100 (Fax)

Kathleen Schuchard

University of Tennessee, Knoxville ( email )

916 Volunteer Blvd
Knoxville, TN 37916
United States
8659741756 (Phone)

Danielle Stanley

University of Tennessee, Knoxville ( email )

453 Haslam Business Building
Knoxville, TN 37996-4140
United States

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