Examining the Effects of the TCJA on Executive Compensation

54 Pages Posted: 17 Jun 2019 Last revised: 16 Mar 2021

See all articles by Lisa De Simone

Lisa De Simone

University of Texas at Austin

Charles McClure

University of Chicago Booth School of Business

Bridget Stomberg

Indiana University - Kelley School of Business

Date Written: March 16, 2021

Abstract

As part of the “Tax Cuts and Jobs Act” (TCJA), Congress repealed a long-standing exception that allowed companies to deduct executives’ qualified performance-based compensation in excess of $1 million. The reason for the change was to reverse a shift in executive compensation away from cash compensation and towards performance pay, which Congress believed led executives to focus on short-term results rather than the long-term success of the company. The purpose of this study is to test the efficacy of this provision as part of the TCJA. Across a battery of tests, including a difference-in-differences design that exploits the staggered time-series implementation of the deduction limit, we find little evidence that the average firm changed the level or structure of CEO compensation after the TCJA as Congress intended. Overall, our findings suggest this change was ineffectual as enacted. Our results have implications for future policymakers who endeavor to adjust pay inequality or managerial myopia through tax laws targeted at executive compensation.

Keywords: taxes, executive compensation, TCJA

Suggested Citation

De Simone, Lisa and McClure, Charles and Stomberg, Bridget, Examining the Effects of the TCJA on Executive Compensation (March 16, 2021). Kelley School of Business Research Paper No. 19-28, Available at SSRN: https://ssrn.com/abstract=3400877 or http://dx.doi.org/10.2139/ssrn.3400877

Lisa De Simone

University of Texas at Austin ( email )

2110 SPEEDWAY
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Austin, TX 78705
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HOME PAGE: http://www.lisa-desimone.com

Charles McClure

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

Bridget Stomberg (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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