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Do taxes explain why firms rarely use performance-based malus contracts?

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  • Niemann, Rainer
  • Sailer, Mariana

Abstract

Performance-based bonus contracts trigger financial rewards if goals are attained, while performance-based malus contracts punish target failure by means of financial penalties. Recommended and demanded by various stakeholders, malus contracts can be a competitive alternative that curbs high executive remuneration—nevertheless, firms rarely implement them in executive remuneration packages. A reason for this may lie in the tax treatment of corporate losses and executive remuneration. We analytically examine the effects of the most common forms of corporate taxation (symmetric and asymmetric) and personal wage taxation (proportional and progressive) on a firm owner’s contract choice. Our findings show that neither symmetric corporate nor proportional wage taxation impede malus contracts. However, asymmetric corporate taxation tends to disadvantage malus contracts compared to bonus contracts. Furthermore, progressive wage taxation has the potential to make malus contracts less attractive. This insight can add to the explanation for why firms rarely use performance-based malus contracts.

Suggested Citation

  • Niemann, Rainer & Sailer, Mariana, 2024. "Do taxes explain why firms rarely use performance-based malus contracts?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:jiaata:v:55:y:2024:i:c:s1061951824000223
    DOI: 10.1016/j.intaccaudtax.2024.100616
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    More about this item

    Keywords

    Bonus contracts; Malus contracts; Asymmetric corporate taxation; Progressive wage taxation;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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