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Executive Compensation, Interlocked Compensation Committees, and the 162(M) Cap on Tax Deductibility

83 Pages Posted: 28 Jan 2007  

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Yonghan Wu

Barclays Global Investors

Date Written: January 2007

Abstract

Tax code IRS Section 162(m) effective prohibits corporate tax deductibility of non-performance based compensation expenses over $1 million for any one of its top 5 employees. This $1 million cap also applies to all forms of compensation if a firm has an insider on its compensation committee, thus imposing differing cost of compensation on firms with differing compensation committee structures. Using the introduction as a natural experiment, we provide evidence of agency problems and private benefit seeking behaviors that increases with managerial entrenchment and interlocked compensation committee. We find a significant salary reduction for executives dropping their interlock statuses as a result of 162(m). More broadly, we examine 162(m)'s effect on compensation and describe where it is ineffective or has unintended consequences.

Keywords: Corporate Governance, Executive Compensation, Insiders, Interlock, Corporate Taxes

JEL Classification: G18, G30, G38, G34, G39, J33, K33

Suggested Citation

Graham, John R. and Wu, Yonghan, Executive Compensation, Interlocked Compensation Committees, and the 162(M) Cap on Tax Deductibility (January 2007). Available at SSRN: https://ssrn.com/abstract=959686 or http://dx.doi.org/10.2139/ssrn.959686

John Graham (Contact Author)

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yonghan Wu

Barclays Global Investors ( email )

EC3N 4HH
London
United Kingdom

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