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Changes in CEO Compensation after the Tax Cuts & Jobs Act and the Impact of Corporate Governance: Initial Evidence

Monday September 16, 2019

Abstract

The Tax Cuts and Jobs Act (TCJA) expanded the impact of IRC Section 162(m) by disallowing deductions for any compensation over $1 million paid to top executives. Under prior law qualified performance-based pay was exempt from the $1 million cap. We examine whether TCJA affected compensation decisions in the first year following enactment. We identify a tax sensitive group of firms and use a difference-in-difference design to test our main hypotheses. We find that CEO salary is higher post-TCJA in the treatment group, but find no significant differences for total compensation. Our results provide some evidence that eliminating the tax incentive to structure CEO pay as performance-based impacted the mix of compensation. In our cross sectional tests focusing on corporate government attributes, we find total compensation is higher at firms where a higher percentage of outside directors and members of the compensation committee were appointed during the CEO’s tenure.

Luna, LeAnn and Schuchard, Kathleen, and Stanley, Danielle (September 2019)