1 A Reinvestigation of the Impact of Section 162(m) of the Internal Revenue Code: The Peculiar Case of CFOs

• In Event: Taxation 2

Abstract

Section 162(m) denies the tax deduction for non-performance based compensation in excess of $1 million for highly paid public firm executives. However on June 5, 2007, the IRS specifically excluded CFOs from the constraints of §162(m). We take advantage of this natural experiment by empirically examining how CFO compensation changed with this exclusion, using a difference-in-difference design that includes CFOs unaffected by §162(m) and other executives as a benchmark. With CFOs excluded from §162(m), we predict that firms will increase their reliance on lower risk fixed salary for CFOs, which will reduce the compensation risk premium, reducing CFO total compensation relative to other executives. Our empirical results support our predictions. We thus extend prior literature by providing evidence that taxes can influence compensation design, that §162(m) continues to influence compensation design, and that §162(m) influences non-CEO compensation.

Authors

• Steven Balsam, Temple University

• John H Evans III, University of Pittsburgh

• Amy J. N. Yurko, Duquesne University