Examining the Effects of the Tax Cuts and Jobs Act on Executive Compensation

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See all articles by Lisa De Simone

Lisa De Simone

University of Texas at Austin

Charles McClure

University of Chicago Booth School of Business

Bridget Stomberg

Indiana University - Kelley School of Business

Date Written: June 6, 2022

Abstract

As part of the Tax Cuts and Jobs Act (TCJA), the US Congress repealed a long-standing exception that allowed companies to deduct executives’ qualified performance-based compensation in excess of $1 million. The purpose of this study is to examine whether Congress achieved its stated objective of reversing a shift in executive compensation away from cash compensation and towards performance pay, which Congress believed led executives to focus on short-term results rather than the long-term success of the company. Across a battery of tests, including a difference-in-differences design that exploits the staggered time-series implementation of the deduction limit, we find evidence compatible with the new deduction limit having no effect on executives’ salary, performance pay or total compensation, inconsistent with Congressional intent. Our results suggest that taxes are not a first-order effect of executive pay and that tax regulation could be relatively ineffective at curbing executive compensation.

Keywords: executive compensation, tax reform

Suggested Citation

De Simone, Lisa and McClure, Charles and Stomberg, Bridget, Examining the Effects of the Tax Cuts and Jobs Act on Executive Compensation (June 6, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=

Lisa De Simone (Contact Author)

University of Texas at Austin ( email )

2110 SPEEDWAY
Stop B6400
Austin, TX 78705
United States

HOME PAGE: http://www.lisa-desimone.com

Charles McClure

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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