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Regulating Executive Pay: Using the Tax Code to Influence CEO Compensation

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  • Nancy L. Rose
  • Catherine Wolfram

Abstract

This study explores corporate responses to 1993 legislation, implemented as section 162(m) of the Internal Revenue Code, that capped the corporate tax deductibility of top management compensation at $1 million per executive unless it qualified as substantially performance-based.' We detail the provisions of this regulation, describe its possible effects, and test its impact on U.S. CEO compensation during the 1990s. Data on nearly 1400 publicly-traded U.S. corporations are used to explore the determinants of section 162(m) compensation plan qualification and the effect of section 162(m) on CEO pay. Our analysis suggests that section 162(m) may have created a focal point' for salary compensation, leading some salary compression close to the deductibility cap. There is weak evidence that compensation plan qualification is associated with higher growth rates, as would be the case if qualification relaxed some political constraints on executive pay. There is little evidence that the deductibility cap has had significant effects on overall executive compensation levels or growth rates at firms likely to be affected by the deductibility cap, however, nor is there evidence that it has increased the performance sensitivity of CEO pay at these firms. We conclude that corporate pay decisions seem to be relatively insulated from this type of blunt policy intervention.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7842.

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Date of creation: Aug 2000
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Publication status: published as Rose, Nancy L. and Catherine Wolfram. "Regulating Executive Pay: Using The Tax Code To Influence Chief Executive Officer Compensation," Journal of Labor Economics, 2002, v20(2,Apr), Part 2, S138-S175.
Handle: RePEc:nbr:nberwo:7842

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  1. Geddes, R Richard, 1997. "Ownership, Regulation, and Managerial Monitoring in the Electric Utility Industry," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 40(1), pages 261-88, April.
  2. Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(2), pages 352-378, April.
  3. Jason R. Barro & Robert J. Barro, 1990. "Pay, Performance, and Turnover of Bank CEOs," NBER Working Papers 3262, National Bureau of Economic Research, Inc.
  4. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 225-64, April.
  5. Joseph G. Haubrich, 1991. "Risk aversion, performance pay, and the principal-agent problem," Working Paper 9118, Federal Reserve Bank of Cleveland.
  6. Catherine Wolfram & Nancy L. Rose, 2000. "Has the "Million-Dollar Cap" Affected CEO Pay?," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 197-202, May.
  7. Catherine D. Wolfram, 1998. "Increases in Executive Pay Following Privatization," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 7(3), pages 327-361, 09.
  8. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  9. Sherwin Rosen, 1990. "Contracts and the Market for Executives," NBER Working Papers 3542, National Bureau of Economic Research, Inc.
  10. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 653-691, August.
  11. Hadlock, Charles J & Lumer, Gerald B, 1997. "Compensation, Turnover, and Top Management Incentives: Historical Evidence," The Journal of Business, University of Chicago Press, vol. 70(2), pages 153-87, April.
  12. Paul L. Joskow & Nancy L. Rose & Catherin D. Wolfram, 1994. "Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry," NBER Working Papers 4980, National Bureau of Economic Research, Inc.
  13. Joskow, Paul L. & Rose, Nancy L. & Shepard, Andrea., 1993. "Regulatory constraints on executive compensation," Working papers 3550-93., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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