How Executive Compensation Changes In Response to Personal Income Tax Shocks (Who Pays the CEO’s Income Taxes?)

59 Pages Posted: 19 Mar 2020 Last revised: 28 Sep 2020

See all articles by Benjamin Bennett

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

Jeffrey L. Coles

University of Utah - Department of Finance

Zexi Wang

Lancaster University

Date Written: March 11, 2020

Abstract

We study the effects of personal income tax on executive compensation. Using a difference-in-differences approach based on large shocks to personal income tax rates, we find CEOs receive higher pay two years after tax increases. The higher tax burden drives CEOs to sell stock of their firms for liquidity reasons. Accordingly, boards increase equity-based pay to strengthen incentives. Pay raises after tax increases are negatively associated with CEO turnover, while the lack of a pay raise leads to lower firm performance. The effect of personal income tax on compensation is asymmetric; CEOs do not receive pay cuts following tax cuts.

Keywords: Executive compensation, Personal income tax, CEO incentives, CEO equity sales

JEL Classification: H24, H71, J33, M12

Suggested Citation

Bennett, Benjamin and Coles, Jeffrey L. and Wang, Zexi, How Executive Compensation Changes In Response to Personal Income Tax Shocks (Who Pays the CEO’s Income Taxes?) (March 11, 2020). Available at SSRN: https://ssrn.com/abstract=3540304 or http://dx.doi.org/10.2139/ssrn.3540304

Benjamin Bennett (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Zexi Wang

Lancaster University ( email )

Lancaster University Management School
Bailrigg
Lancaster, LA1 4YX
United Kingdom

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