Economics Seminar - "How Executive Compensation Changes In Response to Personal Income Tax Shocks (Who Pays the CEO’s Income Taxes?)"

Using staggered personal income tax changes across US states, we quantify the effects of taxes on executive compensation. After a tax rate increase, CEO pay increases within two years by an amount close to fully compensating the CEO for the increased tax liability, indicating a relatively inelastic firm demand curve for managerial input. The pay increase response is larger in more profitable industries and smaller for female CEOs. The higher tax rate motivates CEOs to sell firm stock, perhaps for liquidity. Boards respond by increasing cash pay, to replace the liquidity response, and stock pay, to replenish executive incentives. The income tax effect is asymmetric. CEOs do not experience pay cuts following tax cuts.