Tax-Induced Organizational Complexity and Executive Performance Measurement

65 Pages Posted: 16 Nov 2023

See all articles by John Gallemore

John Gallemore

University of North Carolina Kenan-Flagler Business School

Eva Labro

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Ginger Scanlon

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: October 18, 2023

Abstract

We examine how tax-induced organizational complexity (“TIOC”), which we define as the organizational complexity that would not exist in a zero-tax world, is associated with executive performance measurement. While these structures can facilitate lower tax burdens, firms need to design their performance measurement systems to encourage executives to manage the associated complexity to avoid potential negative consequences. Using firms’ subsidiary structures in tax havens and other low tax countries to measure TIOC, we document several main findings. We find that TIOC is associated with longer-term performance measurement, consistent with boards wanting executives to manage both the short-run tax benefits and longer-run costs associated with TIOC. We also find that TIOC is associated with a greater propensity to use adjusted performance metrics, consistent with firms correcting standard metrics for measurement error and bias introduced by TIOC. Finally, we find that TIOC is associated with a greater usage of unique metrics and lower similarity in metrics across the executive team, consistent with TIOC creating heterogenous activities that top managers need to monitor and manage in support of optimizing taxes. Our study contributes to the tax and managerial accounting literatures by shedding light on how firms manage TIOC via performance measurement.

Keywords: Performance measurement, tax planning, organizational complexity

JEL Classification: H25, H26, J33, M12

Suggested Citation

Gallemore, John and Labro, Eva and Scanlon, Ginger, Tax-Induced Organizational Complexity and Executive Performance Measurement (October 18, 2023). Kenan Institute of Private Enterprise Research Paper No. 4606256, Available at SSRN: https://ssrn.com/abstract=4606256 or http://dx.doi.org/10.2139/ssrn.4606256

John Gallemore (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.johngallemore.com

Eva Labro

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
(919) 962-5747 (Phone)

Ginger Scanlon

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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