Finance Series
When the Tax Break Breaks: CEO Pay and Turnover Following TCJA
Working Paper Author/Authors
Arizona State University
Cornell SC Johnson College of Business
Key Finding
We use the TCJA’s elimination of the performance-based pay deduction to examine how tax policy affects the structure of CEO pay
Abstract
We examine how firms adjust CEO compensation following the Tax Cuts and Jobs Act (TCJA), which eliminated the tax deductibility of performance-based pay. Comparing firms with different levels of performance-based pay, CEOs with unaffected top executives in the same firm-year, and U.S. with international firms, we find that CEO performance pay and total compensation decrease following the TCJA relative to the control group. The results are more pronounced for cost-sensitive firms and those requiring firm-specific human capital. Consistent with a moral hazard model, we also find that by raising the after-tax cost of compensation, TCJA created significant labor market disruptions.
