TaxProf Blog

Thursday, August 5, 2021

Galle, Lund & Polsky: Does Tax Matter? Executive Compensation After § 162(m)’s Repeal

Brian D. Galle (Georgetown; Google Scholar), Andrew Lund (Villanova) & Gregg D. Polsky (Georgia; Google Scholar), Does Tax Matter? Evidence on Executive Compensation after 162(m)’s Repeal, 26 Stan. J. L., Bus. & Fin. 1 (2021) (reviewed by Mirit Eyal-Cohen (Alabama; Google Scholar) here):

As a part of essentially the most sweeping federal tax reform in a era, the Tax Cuts and Jobs Act (“TCJA”) radically altered the tax therapy of compensation paid to senior executives of public corporations. Previous to the TCJA, fee of such compensation in extra of 1 million {dollars} was non-deductible besides to the extent the compensation was performance-based. The TCJA eradicated the exception so that each one senior government compensation above a million {dollars} is now non-deductible no matter whether or not it’s performance-based or not.

This reform offers a pure experiment to check the position of tax regulation in influencing managerial pay choices, a problem that has been debated for many years by students and policymakers. Did the elimination of the performance-based pay exception affect senior government compensation choices?

Utilizing a novel empirical design, we discover no proof that the repeal of the performance-based pay exception modified essentially the most important and salient compensation options, particularly the proportion of performance-based pay to whole pay and the general quantity of pay. However, after we transfer from headline compensation options to smaller technical ones, our knowledge means that the tax change has had a major affect. This implies that tax guidelines could also be solely consequential in shaping government compensation when nobody else is paying consideration in any other case.

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