CEO After-Tax Compensation Incentives and Corporate Tax Avoidance

Gaertner, Fabio B.

doi:10.2139/ssrn.1524390

Cited by 20 publications

(11 citation statements)

References 47 publications

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“…A possible explanation could be that running an aggressive tax strategy is not only costly to the CEO in terms of effort, but it could also bear additional risk for him. This hypothesis is in line with Gaertner (2013). Apart from a potentially higher volatility of firm fundamentals, and thus of the bonus payments, the executive might incur personal risks such as a loss From a shareholders' perspective, setting such incentives makes sense if the expected gains from running an aggressive tax strategy exceed the expected costs from potential risk to firm value and from incentivizing the CEO.…”

Section: Discussionmentioning

confidence: 55%

Are CEOS Incentivized to Avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts

Schmittdiel

2014

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. ExecuComp data from 1992 to 2010, we find mixed results. Looking at the whole sample, the average bonus contract rewards tax savings excessively in comparison to other determinants of corporate net income. A possible explanation is that managers require to be compensated for the additional risk inherent in running an aggressive tax strategy. In accordance with previous literature, we document a substantial heterogeneity in compensation practices across industries. It appears that our main result is driven by firms in the Industrial and Retail sectors. We further find that companies with greater tax planning opportunities, for example by virtue of size or operations abroad, are more likely to condition the CEO's bonus on corporate income taxes. Terms of use: Documents in

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Section: Discussionmentioning

confidence: 55%

Are CEOS Incentivized to Avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts

Schmittdiel

2014

SSRN Journal

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“…Healy (1985) suggests that executives choose accounting procedures that increase their compensation. Further research notes that managers have different reporting incentives based on whether their bonus is based on pre-tax or after-tax income (Phillips 2003;Gaertner 2014;Powers, Robinson, and Stomberg 2016). Therefore, we predict a positive relation between CEO bonus alignment with pre-tax income and classification of all UTB interest and penalty expense in tax expense.…”

Section: Introductionmentioning

confidence: 71%

“…Prior research provides evidence that CEOs can be compensated on an after-tax basis or on a pre-tax basis (Phillips 2003;Gaertner 2014). In addition, Powers et al (2016) find that different metrics (cash flow versus earnings, pre-tax earnings versus after-tax earnings) used to determine CEO annual performance bonuses are associated with different financial reporting choices related to taxes (i.e., designation of foreign earnings as permanently reinvested, discretionary reserves for tax uncertainty).…”

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confidence: 99%

“…In the spirit of Gaertner (2014), PreTax_CEO_Pay is an indicator variable that equals 1 when R 2 from the firm-specific time series analysis of CEO cash compensation (logged total of salary, bonus, and non-equity incentives) regressed on pre-tax income is greater than the R 2 from the firm-specific time series analysis of CEO cash compensation regressed on net income. CEO compensation is acquired from Execucomp, and all firm observations available from 1993 to 2006 were utilized.…”

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confidence: 99%

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Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

Abernathy

Beyer

Gross

et al. 2017

The Journal of the American Taxation Association

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Financial Accounting Standards Board Interpretation No. 48 (FIN 48, FASB 2006) allows discretion regarding the income statement classification of interest and penalty expenses for unrecognized tax benefits (UTBs). We investigate whether tax avoidance, management compensation, and debt agreements affect the expense classification election and whether this discretion has implications for financial statement users. We find firms that engage in tax avoidance activities, measured by effective tax rates (ETRs) and involvement in tax disputes, are more likely to include interest and penalties in tax expense. We also find that interest and penalties are more likely to be classified as tax expense when CEO compensation is more sensitive to pre-tax income. Finally, we find that UTB interest and penalty expense classification is associated with analysts' ETR forecast accuracy, which suggests there is a potential unintended consequence related to decision usefulness of FIN 48 reporting due to expense classification discretion.

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“…Prior empirical research by Phillips (2003) and Gaertner (2014) finds a negative relation between the use of after-tax incentives and effective tax rates, showing that after-tax performance measures encourage managers to engage in tax avoiding activities. The above prediction extends this literature by saying that the intensity of incentives depends on whether the firm uses after-or pre-tax performance measures.…”

mentioning

confidence: 96%

Taxation and agency conflicts between firm owners and managers: a review

Bauer

Kourouxous

Krenn

2017

Bus Res

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When analyzing the influence of taxation on agency conflicts between firm owners and managers, one can draw on theoretical principal-agent literature from various research fields. In recent years, this interdisciplinary research has grown significantly covering research with regards to optimal compensation, investment decisions, tax avoidance and transfer pricing while analyzing the effects of corporate income taxes, wage taxes, bonus taxes and shareholder taxes. Our paper provides a comprehensive review of analytical literature that studies the influence of taxation on agency conflicts between firm owners and managers. Above and beyond summarizing research findings, we discuss how taxes are commonly implemented in We thank Claire Estebanez, Joachim Gassen, Thomas Gehrig, Rainer Niemann, Thomas Pfeiffer, and two anonymous referees for their valuable comments and suggestions. We are grateful to participants at the VHB conference 2016, the DART Accounting Workshop at the University of Graz and a research seminar at the University of Vienna.

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CEO After-Tax Compensation Incentives and Corporate Tax Avoidance

Cited by 20 publications

References 47 publications

Are CEOS Incentivized to Avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts

Are CEOS Incentivized to Avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts

Income Statement Reporting Discretion Allowed by FIN 48: Interest and Penalty Expense Classification

Taxation and agency conflicts between firm owners and managers: a review

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