Examining the Effects of the Tax Cuts and Jobs Act on Executive Compensation

As part of the Tax Cuts and Jobs Act (TCJA), the US Congress repealed a long-standing exception that allowed companies to deduct executives’ qualified performance-based compensation in excess of $1 million. The purpose of this study is to examine whether Congress achieved its stated objective of reversing a shift in executive compensation away from cash compensation and towards performance pay, which Congress believed led executives to focus on short-term results rather than the long-term success of the company. Across a battery of tests, including a difference-in-differences design that exploits the staggered time-series implementation of the deduction limit, we find evidence compatible with the new deduction limit having no effect on executives’ salary, performance pay or total compensation, inconsistent with Congressional intent. Our results suggest that taxes are not a first-order effect of executive pay and that tax regulation could be relatively ineffective at curbing executive compensation