Do Taxes Explain Why Firms Rarely Use Performance-Based Malus Contracts?

Journal of International Accounting, Auditing and Taxation

57 Pages Posted: 29 Oct 2022 Last revised: 29 Jun 2023

See all articles by Rainer Niemann

Rainer Niemann

University of Graz, Center for Accounting Research; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Mariana Sailer

Vienna University of Economics and Business

Date Written: June 28, 2023

Abstract

Performance-based bonus contracts trigger financial rewards in the case of goal attainment, while performance-based malus contracts punish target failure by means of financial deductions. Recommended and demanded by various stakeholders, malus contracts can be a competitive alternative that curbs high executive remuneration—nevertheless, firms rarely implement them in executive remuneration. A reason for this may lie in the tax treatment of corporate losses and executive remuneration. We analytically examine the effects of the most common forms of corporate taxation (symmetric and asymmetric) and personal wage taxation (proportional and progressive) on a firm owner’s contract choice. Our findings show that neither symmetric corporate nor proportional wage taxation impede malus contracts. However, asymmetric corporate taxation tends to disadvantage malus contracts compared to bonus contracts. Furthermore, progressive wage taxation has the potential to make malus contracts less attractive. This insight can add to the explanation for why firms rarely use performance-based malus contracts.

Keywords: bonus contracts, malus contracts, asymmetric corporate taxation, progressive wage taxation

JEL Classification: D86, H21, M41

Suggested Citation

Niemann, Rainer and Sailer, Mariana, Do Taxes Explain Why Firms Rarely Use Performance-Based Malus Contracts? (June 28, 2023). Journal of International Accounting, Auditing and Taxation, Available at SSRN: https://ssrn.com/abstract=4256861 or http://dx.doi.org/10.2139/ssrn.4256861

Rainer Niemann

University of Graz, Center for Accounting Research ( email )

Universitätsstr. 15 / G2
Graz, 8010
Austria
+43-316-380-6444 (Phone)
+43-316-380-9595 (Fax)

HOME PAGE: http://www.uni-graz.at/steuer

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Mariana Sailer (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
84
Abstract Views
481
Rank
546,623
PlumX Metrics