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Are CEOs incentivized to avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts

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  • Heiner Schmittdiel

    (Erasmus University Rotterdam)

Abstract

In this paper, we test empirically whether there is a relationship between corporate income taxes and CEO bonus payments. Using Compustat and 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.

Suggested Citation

  • Heiner Schmittdiel, 2014. "Are CEOs incentivized to avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts," Tinbergen Institute Discussion Papers 14-048/VII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140048
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    References listed on IDEAS

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    Cited by:

    1. Mohd Waliuddin Mohd Razali & Afizal Eizaz Abdul Razak & Sharon Cheuk Choy Sheung & Dyg Haszelinna Abg Ali, 2019. "Directors Remuneration and Tax Planning of Listed Companies," International Journal of Asian Social Science, Asian Economic and Social Society, vol. 9(11), pages 544-553, November.
    2. Ming-Chin Chen & Chia-Wen Chang & Mei-Chueh Lee, 2020. "The effect of chief financial officers’ accounting expertise on corporate tax avoidance: the role of compensation design," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 273-296, January.

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    More about this item

    Keywords

    CEO incentives; executive compensation; tax avoidance;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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