Do Corporate Taxes Affect Executive Compensation?

Abstract

The limitation of executive compensation has been a matter of public and policy debate for at least 20 years. We examine a regulatory action in Austria in 2014 where the tax deductibility of the total value of executive compensation is unavoidably limited. We find no average effects on the growth or composition of executives’ pay. However, the deductibility limit affects the managers of firms with low bargaining power and of firms with strong corporate governance, indicating that they are affected by the deductibility limit. Additionally, the contract durations for executives decrease after renegotiation. We further find that affected firms experience cuts in investment and research and development, suggesting that shareholders bear part of the economic burden. Our results indicate that the effectiveness of other reforms, such as the Tax Cuts and Jobs Act of 2017, in restricting executive pay is rather limited.