Regulating Executive Pay: Assessing the Impact of the Tax-Deductibility Cap on Executive Compensation

Posted: 3 Sep 1999

See all articles by Nancy L. Rose

Nancy L. Rose

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Catherine D. Wolfram

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Date Written: December 1997

Abstract

This paper considers the effects of the 1993 legislation limiting the deductibility of non-performance-based executive compensation for corporate income tax purposes. We begin by describing the specific provisions of the legislation, and we discuss its possible effects on overall compensation levels and the relative importance of different components of compensation. Our empirical analysis focuses first on modeling firms' decisions about how to comply with the law. We then present results on the effects of the tax cap on compensation. Generally, we find that firms affected by the law are increasing salary more slowly than non-affected firms, thought performance-related components of compensation continue to grow. In fact, we find that firms that qualified their stock plan as performance-based have increased non-cash compensation more than other firms. That finding may suggest that boards designate very high potential stock awards as performance-based to exempt them from the deductibility limitation and then fail to withhold all or part of the award.

JEL Classification: G31, G32, H25, J31, J33

Suggested Citation

Rose, Nancy L. and Wolfram, Catherine D., Regulating Executive Pay: Assessing the Impact of the Tax-Deductibility Cap on Executive Compensation (December 1997). Available at SSRN: https://ssrn.com/abstract=74300

Nancy L. Rose

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Room E52-318A
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Catherine D. Wolfram (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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