The Taxation of Executive Compensation
In: Tax Policy and the Economy, Volume 14
Over the past 20 years, there has been a dramatic increase in the share of executive compensation paid through stock options. In this paper, we examine the extent to which tax policy has influenced the composition of executive compensation, and discuss the implications of rising stock-based pay for tax policy. We begin by describing the tax rules for executive pay in detail and analyzing how changes in various tax rates affect the tax advantages of stock options relative to salary and bonus. Our empirical analysis leads to three conclusions. First, there is little evidence that tax changes have played a major role int the dramatic explosion in executive stock option pay since 1980. Although the tax advantage of options has approximately dounbled since the early advantage of options has approximately doubled since the early 1980s options currently have only a slight tax advantage relative to cash - approximately $4 per $100 of pre-tax compensation to the executive. A more convincing story for the dramatic explosion in stock options involves changes in corporate governance and the market for corporate control. For example, there is a strong correlation between the fraction of shares held by large institutional investors and the fraction of ececutive pay in the form of stock options, a result that holds both longitudinally and cross-sectionally. Second, we find evidence that the million dollar rule (which limited the corporate deductibility of non-performance-related executive compensateion to $1 million) led firms to adjust the composition of their pay away from salary and toward "performance related pay," although our estimates suggest that substitution was minor. We find no evience that the regulation decreased the level of total compensation. Third, we examine whether there is evidence for significant shifting of the timing of option exercieses in response to changes in tax rates. After replicating the Goolsbee (1999) result regardin tax-shifting with our
(This abstract was borrowed from another version of this item.)
|This chapter was published in: ||This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number
10845.||Handle:|| RePEc:nbr:nberch:10845||Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Feldstein, Martin, 1995.
"The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act,"
Journal of Political Economy,
University of Chicago Press, vol. 103(3), pages 551-72, June.
- Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
- John R. Graham & Michael L. Lemmon, 1998. "Measuring Corporate Tax Rates And Tax Incentives: A New Approach," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(1), pages 54-65.
- Alan J. Auerbach, 1986.
"The Dynamic Effects of Tax Law Asymmetries,"
Review of Economic Studies,
Oxford University Press, vol. 53(2), pages 205-225.
- Paul A. Gompers & Andrew Metrick, 1998.
"Institutional Investors and Equity Prices,"
NBER Working Papers
6723, National Bureau of Economic Research, Inc.
- Paul A. Gompers & Andrew Metrick, . "Institutional Investors and Equity Prices," Rodney L. White Center for Financial Research Working Papers 20-99, Wharton School Rodney L. White Center for Financial Research.
- Jensen, Michael C & Murphy, Kevin J, 1990.
"Performance Pay and Top-Management Incentives,"
Journal of Political Economy,
University of Chicago Press, vol. 98(2), pages 225-64, April.
- George P. Baker & Brian J. Hall, 1998. "CEO Incentives and Firm Size," NBER Working Papers 6868, National Bureau of Economic Research, Inc.
- Daniel Feenberg & James Poterba, 1992.
"Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns,"
NBER Working Papers
4229, National Bureau of Economic Research, Inc.
- Daniel R. Feenberg & James M. Poterba, 1993. "Income Inequality and the Incomes of Very High-Income Taxpayers: Evidence from Tax Returns," NBER Chapters, in: Tax Policy and the Economy, Volume 7, pages 145-177 National Bureau of Economic Research, Inc.
- Feenberg, D.R. & Poterba, J.M., 1992. "Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns," Working papers 92-16, Massachusetts Institute of Technology (MIT), Department of Economics.
- Yermack, David, 1995. "Do corporations award CEO stock options effectively?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 237-269.
- Brian J. Hall, 1999. "The Design Of Multi-Year Stock Option Plans," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(2), pages 97-106.
- Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
- Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 653-691.
- repec:oup:restud:v:53:y:1986:i:2:p:205-25 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:10845. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.