We exploit a December 22, 2017 law change to examine the relation between corporate taxes and executive compensation. The so-called “Tax Cuts and Jobs Act” (TCJA) repealed a long-standing exception that previously allowed publicly-traded companies to deduct executives’ qualified performance-based compensation in excess of $1 million. The new regime is effective for tax years beginning after December 31, 2017. Using a difference-in-differences design to examine executive compensation paid in fiscal years 2017 and 2018, we find no evidence that firms impacted by the TCJA in their 2018 fiscal years changed total compensation, compensation mix, or pay-performance sensitivity relative to control firms that are not subject to the new regime until their 2019 fiscal years. These findings suggest Congress may have structured the law inefficiently or that Treasury delayed guidance for too long, potentially causing delays in firms’ responses.
De Simone, Lisa and McClure, Charles and Stomberg, Bridget, Examining the Immediate Effects of Recent Tax Law Changes on the Structure of Executive Compensation (June 17, 2019). Available at SSRN: https://ssrn.com/abstract=3400877