CEO After-Tax Compensation Incentives and Corporate Tax Avoidance

Abstract

I examine the association between CEOs’ after-tax incentives and their firms’ level of tax avoidance. Economic theory holds that firms should compensate CEOs on an after-tax basis when the expected tax savings generated from additional incentive alignment outweigh the incremental compensation demanded by CEOs for bearing additional tax-related compensation risk. Using hand-collected data from proxy statements, I find a negative relation between the use of after-tax incentives and effective tax rates. I also find a positive association between the use of after-tax incentives and CEO cash compensation, suggesting that CEOs who are compensated on an after-tax basis demand a premium for bearing additional risk.