Taxes and Executive Pay: Evidence from Nonqualified Deferred Compensation

I study the influence of tax deductibility on decisions to defer executive compensation by exploiting a plausibly exogenous tax change that increases the deductibility of the chief financial officer’s (CFO’s) nonperformance-based compensation, with no impact on the nontax determinants of deferrals. Using a difference-in-differences research design, I find that CFO deferred compensation significantly decreases after the tax change, relative to the deferrals of the chief executive officer (CEO) and the highest paid non-CEO and non-CFO executive in the same firm. This finding is more pronounced for firms with higher marginal tax rates and thus greater tax benefits of deferrals. Additional tests show that tax deductibility also influences firms’ decisions on nonperformance-based compensation and that CFO total pay appears to decline in response to decreased deferrals.

This paper was accepted by Shivaram Rajgopal, accounting.

Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2020.01483.