In the Nick of Time: Performance-Based Compensation and Proactive Responses to the Tax Cuts and Jobs Act

Journal of Management Accounting Research, 2020, Forthcoming

46 Pages Posted: 29 Oct 2020

See all articles by Jon Durrant

Jon Durrant

California State University, Fullerton

James Jianxin Gong

California State University at Fullerton

Jennifer Howard

California State University, Long Beach

Date Written: September 9, 2020

Abstract

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced two major changes that may influence the structure of executive compensation: (1) reducing corporate tax rates from 35 to 21 percent and (2) eliminating the performance-based pay exception in Section 162(m). These changes provide incentives to maximize deductible compensation expense in 2017, before the TCJA goes into effect. Therefore, we predict performance-based compensation to increase more in 2017 relative to prior years. Consistent with our expectation, we find that the increase in CEO bonus and stock option compensation is significantly greater in 2017. Our difference-in-difference results are consistent with the tax rate reduction driving the bonus increase and the repeal of the performance-based exception leading to the increase in CEO stock options. The TCJA also changed the definition of covered employees to include the CFO. We find weak evidence for abnormal increases in CFO performance-based compensation. Additional analyses indicate firms facing stronger tax incentives drive our results. Overall, our findings suggest that firms’ responded to the TCJA in the period before it was effective.

Keywords: Executive Compensation, Employee Stock Options, Performance-Based Pay, Tax Reform, Tax Cuts and Jobs Act of 2017, Section 162(m)

JEL Classification: G34,G38

Suggested Citation

Durrant, Jon and Gong, Jianxin and Howard, Jennifer, In the Nick of Time: Performance-Based Compensation and Proactive Responses to the Tax Cuts and Jobs Act (September 9, 2020). Journal of Management Accounting Research, 2020, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3689852 or http://dx.doi.org/10.2139/ssrn.3689852

Jon Durrant (Contact Author)

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Jianxin Gong

California State University at Fullerton ( email )

School of Accountancy
College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)

Jennifer Howard

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States

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