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Executive Compensation And Macroeconomic Factors: Interest Rates And Corporate Taxation

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  • Lawrence P. Schrenk

Abstract

It is frequently argued that effective executive compensation should contain some performance-based remuneration. We lack, however, serious understanding of the characteristics of the many patterns of variable compensation in use. It is too often assumed that these different methods of compensation are (at least approximate) substitutes. In this paper, we develop a simulation model of executive compensation, in which both equity and option compensation is utilized, in order to analyze the effect of macroeconomic factors, namely, interest rates and the level of corporate taxation, on optimal executive compensation. The model forecasts that, as the risk free rate of interest increases, there is a general shift toward equity compensation; by contrast, as the level of corporate taxation increases the shift is toward option compensation.

Suggested Citation

  • Lawrence P. Schrenk, 2008. "Executive Compensation And Macroeconomic Factors: Interest Rates And Corporate Taxation," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 2(1), pages 125-135.
    • Handle: RePEc:ibf:gjbres:v:2:y:2008:i:1:p:125-135
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    References listed on IDEAS

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    Cited by:

    1. Aspen Gorry & Kevin A. Hassett & R. Glenn Hubbard & Aparna Mathur, 2017. "The Response of Deferred Executive Compensation to Changes in Tax Rates," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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