Regulating Executive Pay: Assessing the Impact of the Tax-Deductibility Cap on Executive Compensation
Posted: 3 Sep 1999
Date Written: December 1997
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: Suggested Citation