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 companies adjust CEO compensation in response to the Tax Cuts and Jobs Act (TCJA) of 2017, which eliminated the tax deductibility of performance-based pay. By comparing firms with high and low levels of performance-based pay before the TCJA, as well as CEOs with unaffected top executives within the same firm and year, we find that both CEO performance pay and total compensation decrease following the TCJA when compared to the control group. Consistent with our theoretical framework, we also find that by increasing the after-tax cost of compensation, the TCJA created significant labor market disruptions, with some firms letting go of higher-ability CEOs and hiring less expensive replacements.
