CEO After-Tax Compensation Incentives and Corporate Tax Avoidance

Several recent academic studies explore the determinants of corporate tax avoidance,1 while a subset of these studies examines whether management incentives help explain the tax avoidance profile of the firm. So far, the results are mixed. In the first paper to directly test the effect of incentivizing managers to reduce their firms' tax burden, Phillips (2003) finds no evidence that chief executive officers (CEOs) whose bonuses are tied to after-tax earnings performance are more effective in lowering firms' effective tax rates (ETRs).2 This finding is supported by Armstrong, Blouin, and Larcker (2012), who find no relation between the level of CEO pay and corporate tax avoidance. On the other hand Rego and Wilson (2012) examine CEO equity compensation and find that stock option convexity is positively related to tax aggressiveness. I add to this stream of literature by extending Phillips (2003) and reexamining whether the use of after-tax accounting earnings in CEO bonus compensation leads to greater corporate tax avoidance.3 I begin my study on the consequences of using after-tax incentives in CEO compensation by reexamining the question after increasing statistical power.