Taxes and Executive Compensation: Evidence from Stock Options

Andrew Bird

No 2015-E26, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: Understanding the effects of taxes on executive compensation provides insight into the process determining this compensation and is a key input to top income tax rate policy. A recent tax reform in Canada, which greatly increased the effective tax rate on stock option compensation for a subset of firms, provides a natural experiment with which to address this question. Difference-in-differences estimates suggest that this tax increase resulted in an immediate reduction in both stock option grants and the fraction of total compensation made up of stock options with limited, if any, substitution towards other components of compensation.

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