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

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