AJM - Abstracts

Incentive and Tax Effects of Executive Compensation Plans

Clifford W. Smith, Jr. and Ross L. Watts

Abstract

The ability of two (non-mutually exclusive) potential explanations of executive compensation plans is examined. One is that the plans reduce the combined tax liability of the corporation and its managers. The other is that the plans encourage the managers to maximise the value of the firm. It is found that the tax effect can explain some of the popularity of compensation plans, some of the variation in their use across firms, and the timing of changes in the provisions of plans. However, there are variations in the cross-sectional use of the plans that cannot be explained by the taxes, which can be explained by incentive efforts.

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Keywords

EXECUTIVE COMPENSATION; INCENTIVES; TAXES.

Contact Details

Clifford W. Smith, Jr.
University of Rochester
Rochester, New York, USA.

Ross L. Watts
University of Rochester
Rochester, New York, USA.

The authors wish to acknowledge the financial support of the Center for Research in Government Policy and Business and the Managerial Economic Research Center, Graduate School of Management, University of Rochester, Rochester, New York, USA.