Abstract
The 2017 Tax Cuts and Jobs Act (TCJA) expanded the impact of IRC Section 162(m) by disallowing a tax deduction for any compensation over $1 million paid to top executives. Under prior law, qualified performance-based compensation was exempt from the $1 million limit. Using OLS regressions, we examine whether TCJA affected CEO compensation immediately after enactment. We find evidence that CEO salaries, non-equity incentive pay, stock awards and total compensation are all higher after TCJA. While the law change increases the after-tax cost of compensation for the average firm, our results show that TCJA did not constrain CEO compensation. However, relative to the average effect, in cross-sectional analyses, we find some evidence that compensation was lower for strong CEOs post TCJA. We also find some evidence that CEOs at firms with high leverage and net deferred tax assets, including tax net operating losses, saw a decrease in various types of incentive compensation post TCJA.
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