Do Tax Reforms Affect Firm Performance and Executive Remuneration? Evidence from a Compressed Wage Environment

Abstract

The agency framework predicts a strong positive relationship between executive effort, pay and firm performance. We study how changes in Norwegian payroll tax legislation and earnings tax (which influenceCEOs’ return on effort), affect firm performance and executive earnings for over 11,800 firms. Both reduced payroll tax and reduced marginal earnings tax increase firm performance measured by firms’ operating margins. In the latter case total pay increases, but contingent on the return on firm performance, the fixed wage drops. The sensitivity of the remuneration scheme to the earnings tax depends onCEOproductivity and effort costs.