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Taxes and Executive Compensation: Evidence from the 1990s

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  • Peter Katuscák

Abstract

This article analyzes the effect of personal income taxation on the pay-to-stock-price sensitivity of executive compensation contracts generated by stock option and restricted stock grants. Using Execucomp data for 1992--1996 and variation in the ordinary income marginal tax rate of top earners in the same time period, I find that an increase in the tax rate decreases the pre-tax pay-to-performance sensitivity generated by option grants, whereas stock grant sensitivity is found to be unresponsive to the same change. Even though these results can be explained by joint tax optimization of executives and their employers, they suggest that after-tax incentive provision for executives is quite sensitive to variation in the ordinary income tax rate. (JEL codes: D21, H24) Copyright The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Peter Katuscák, 2009. "Taxes and Executive Compensation: Evidence from the 1990s," CESifo Economic Studies, CESifo Group, vol. 55(3-4), pages 542-568.
    • Handle: RePEc:oup:cesifo:v:55:y:2009:i:3-4:p:542-568
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifp020
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    Cited by:

    1. Doina Radulescu, 2012. "The Effects of a Bonus Tax on Manager Compensation and Welfare," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(1), pages 1-16, March.
    2. Peter Krenn, 2017. "The Impact of Taxes on Competition for CEOs," European Accounting Review, Taylor & Francis Journals, vol. 26(3), pages 503-530, July.
    3. Krenn, Peter, 2015. "The impact of taxes on competition for CEOs," arqus Discussion Papers in Quantitative Tax Research 190, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Martin Widdicks & Jinsha Zhao, 2014. "A Model of Equity Based Compensation with Tax," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 1002-1041, September.
    5. Hilmer, Michael, 2013. "Fiscal treatment of managerial compensation - a welfare analysis," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79703, Verein für Socialpolitik / German Economic Association.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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