Abstract
Compensation incentive schemes are mainly driven by the need to align owner-manager interests in the real corporate world of separation of ownership and control. We find that the role of taxes and its implication for employees’ compensation is, at best, evidently inconclusive in the compensation-taxation literature. Using a literature review/synthesis of the existing research approach, we begin by identifying three distinct forms of employees’ compensation. Then, we examine developing and current state of extant research in order to review the role of taxation and its implication in the corporate choice, and magnitude of remuneration packages. In particular, we highlight the units of investigation in those studies, contextualize their findings, identify gaps or areas that have not been accorded much research attention, and offer suggestions for future analysis and research in this area of taxation vis-a-vis compensation packages. Key words: Employees’ compensation, taxes, incentive alignment.
Highlights
Compensation incentive schemes are mainly driven by the need to align owner-manager interests in the real corporate world of separation of ownership and control (Jensen and Meckling, 1976)
The articles reviewed focus on compensation-taxation relation vis-à-vis the three distinct forms of employees‟ compensation. Both researchers mutually agreed on the identified units of investigation in the sampled studies and evaluate their findings which produce the basis for further analysis in our study
Termination of overfunded pension plans is not motivated by taxation
Summary
Compensation incentive schemes are mainly driven by the need to align owner-manager interests in the real corporate world of separation of ownership and control (Jensen and Meckling, 1976). Schmittdiel writes, “shareholders reward income increase that comes from tax savings more strongly than other net income increases”, thereby concluding that CEOs are “incentivized” to pursue aggressive tax avoidance strategies for favorable compensation contracts. If this is true, it extends research into the realm of reality that investors incentivize tax aggressiveness and reward earnings management. Desai and Dharmapala (2008) report a negative relationship between equity-based compensation and book-tax difference (a proxy for tax avoidance) They show that firms use ownership structures to minimize the effect of taxes on compensation. Concluding comments are provided in the last section (Figure 1)
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