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Incentive and Tax Effects of Executive Compensation Plans


  • Clifford W. Smith Jr.
  • Ross L. Watts

    (The University of Rochester. We wish to acknowledge the financial support of the Center for Research in Government Policy and Business and the Managerial Economic Research Center, Graduate School of Management, University of Rochester, Rochester, New York, USA.)


The ability of two (non-mutually exclusive) potential explanations for executive compensation plans is examined. One is that the plans reduce the combined tax liability of the corporation and its managers. The other is that the plans encourage the managers to maximize the value of the firm. It is found that the tax effect can explain some of the popularity of compensation plans, some of the variation in their use across firms, and the timing of changes in the provisions of the plans. However, there are variations in the cross-sectional use of the plans which cannot be explained by taxes, which can be explained by incentive effects.

Suggested Citation

  • Clifford W. Smith Jr. & Ross L. Watts, 1982. "Incentive and Tax Effects of Executive Compensation Plans," Australian Journal of Management, Australian School of Business, vol. 7(2), pages 139-157, December.
  • Handle: RePEc:sae:ausman:v:7:y:1982:i:2:p:139-157

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