MASTER DEGREE FINANCE AND TAXATION
TAXES AND EXECUTIVE
COMPENSATION: EVIDENCE FROM
THE S&P1500
André Cardoso de Oliveira Carvalho
M
2018TAXES AND EXECUTIVE COMPENSATION: EVIDENCE FROM
THE S&P1500
André Cardoso de Oliveira Carvalho
Dissertation
Master in Finance and Taxation
Supervised by
António de Melo da Costa Cerqueira, PhD. Elísio Fernando Moreira Brandão, PhD.
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Biographical note:
André Cardoso de Oliveira Carvalho is a Portuguese national born on the 12th of August, 1995 in Santa Maria da Feira. He attended the Faculty of Economics at the University of Porto (FEP) from 2013 to 2018. He enrolled in a Bachelor’s course in Economics (from 2013 to 2016), immediately followed by a Master’s course in Finance and Taxation (from 2016 to the present date). The present work marks the conclusion of the Master’s Degree.
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Acknowledgements:
I strongly believe that I would never have been able to achieve writing this dissertation, had it not been for the support of many. I would like to thank the following people:
✓ My supervisor - PhD Professor António Melo Cerqueira and my co-supervisor - PhD Professor Elísio Brandão from the University of Porto – Faculty of Economics and Management, for their guidance in the development of this dissertation;
✓ To my English teacher, Paula Soto, who helped review this work;
✓ My colleagues in the Masters of Finance and Taxation course for all the teamwork, for all the support and for all the things that we did together that made this journey easier;
✓ All the professors that have contributed in some way to my academic life and made me a better student, better professional and better person;
✓ Last, but not least, my family and friends for their support, patience, motivation and love.
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Abstract:
This dissertation analyses executive compensation during the recent years and how tax rates on ordinary income, corporate income and even capital gains affect it. It also takes into account the impact of these tax rates not only on total compensation but also on each component of compensation. This is relevant because only a few studies on executive compensation focus on the impact of tax rates and even the ones that do that, focus mainly on the compensation by stock options. Furthermore, executives are often responsible for the most important corporate decisions and their compensation and attitude towards changes in tax rates could be very important in explaining several decisions such as choosing more options or LTIP compensation instead of the traditional forms. Using a panel data and a recent and innovative analysis with OLS estimation method, we were able to analyse how tax policy affects compensation decisions and the trends in recent years. Execucomp database was the main database used for this study and the sample includes at least the top five annual executives from the highest 75 American firms in the years of 1995, 2000, 2010 and 2015, with a total sample of 117 firms and 3135 executives from 1992 to 2016. Our main findings show that when the tax rate on ordinary income changes, there is a negative and significant effect on Total compensation, current compensation (salary + bonus), options granted, realized options and restricted stocks. On the other hand, there is a positive and significant effect on LTIP Pay-outs compensation. Finally, we have also found results regarding other taxes. For example, the negative impact of the changes in corporate income tax rate on total compensation and in capital gains tax rate on total compensation, options granted and restricted stocks as well as a positive effect in LTIP.
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Resumo:
Esta dissertação analisa a compensação dos executivos nos últimos anos e a forma de como as taxas de imposto do rendimento ordinal, empresarial e de ganhos de capital a afetam, considerando o impacto destas taxas não só na compensação total, mas também em cada componente de remuneração. Isto é relevante, pois poucos estudos sobre a compensação dos executivos focam no impacto das taxas e mesmo os que o fazem, focam maioritariamente na compensação por opções. É também relevante pois os executivos são muitas vezes responsáveis por importantíssimas decisões ao nível da empresa e a sua compensação e comportamento perante alterações nas taxas pode ser bastante importante para explicar muitas decisões como por exemplo escolher mais opções ou LTIP em vez das tradicionais formas. Usando dados em painel e uma análise recente e inovadora, com o método de estimação OLS, analisamos como a política fiscal afeta as decisões de compensação e as tendências nos anos recentes. A principal base de dados utilizada foi a Execucomp e a amostra é constituída pelos principais executivos anuais das 75 maiores empresas Americanas nos anos de 1995, 2000, 2010 e 2015, com um total de 117 empresas e 3135 executivos para o período de 1992 a 2016. Os nossos principais resultados mostram que quando a taxa de imposto sobre o rendimento normal muda, temos um efeito negativo e significativo na compensação total, compensação corrente (salário + bónus), opções concedidas, opções realizadas e ações restritas. Por outro lado, temos um efeito positivo e significante na compensação por LTIP Pay-outs. Por fim, encontramos também resultados para as outras taxas, como por exemplo, o impacto negativo das alterações na taxa de imposto do rendimento empresarial na compensação total e na taxa de ganhos de capital na compensação total, opções concedidas, ações restritas e um impacto positivo na LTIP.
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Index of Content
Biographical note: ... i Acknowledgements: ... ii Abstract: ... iii Resumo: ... iv I. INTRODUCTION ... 1II. LITERATURE REVIEW AND RESEARCH HYPOTHESES ... 6
I. The impact of tax on salary and bonus ... 10
II. The impact of tax on the use of options and restricted stocks ... 12
III. The impact of tax rates on the use of other forms of compensation ... 16
III. SAMPLE, VARIABLES AND METHODOLOGY ... 18
I. The Sample ... 18
II. Variables ... 19
III. Methodology ... 20
IV. RESULTS ... 23
I. Univariate results ... 23
II. Multivariate analysis ... 29
V. CONCLUSION ... 41
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Index of Figures
Figure 1 - Main types of executive compensation in mean by year from 1992 to 2016 in
thousands of dollars. . ... 2
Figure 2 - Evolution of the mean by year of Total Compensation and of the marginal tax rate on ordinary income from 1992 to 2016.. ... 4
Index of Tables
Table 1 - Taxation Rules in US. ... 6Table 2: Summary Statistics ... 25
Table 3: Mean by year in each type of tax in the United States ... 27
Table 4: Pearson’s Correlation ... 28
Table 5: Panel Data regressions: Total Compensation ... 30
Table 6: Panel Data regressions: Total Current Compensation ... 34
Table 7: Panel Data regressions: Salary and Bonus ... 35
Table 8: Panel Data regressions: Options Granted and Realized Options ... 36
Table 9: Panel Data regressions: Restricted Stocks, Realized Options and Options Granted ... 37
Table 10: Panel Data regressions: LTIP, Other annual and All other compensation ... 39
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I.
INTRODUCTION
Executive compensation has been a theme that in recent years has stimulated interest in the community exponentially. It should be noted that up to the end of the 1980s, research on this topic either did not exist or was very small. In fact, Murphy (1999) and Vieito (2008) inform us that on average only one or two articles were written per year. Nowadays, we have a different reality because the number of empirical studies has increased exponentially since the beginning of the 90s. For example, in 1995 there were around 60 a year, but this can also be due to the significant growth in the world economy. In fact, Murphy (1999) even goes so far as to mention that research on executive compensation grows even faster than the paychecks themselves. The 1990s thus ended up being significant for this topic because only then, along with the growth of the world economy, did shareholders feel the need to hire executives and give them incentives so that they could make the market shares of companies increase faster every year. In this way, both academics and researchers began to look for the best form of compensation to motivate executives and reaching conclusions. Taking all of this into consideration, this theme is often presented as one of the most interesting and innovative fields of research on the financial area.
It has thus been observed in several studies, in which not only are the values that matter but also the way executives are paid. Be it short-term through salaries or bonuses, long-term through stock options, restricted stocks and long-term incentive plans or even other forms of compensation as perquisites and private benefits.
Thus, over the years the literature on executive compensation has become quite complex and varied, witnessing a wide variety of approaches. Moreover, since these are often responsible for the most important decisions of companies as well as for their outflows and expenses, it is crucial to highlight their main forms of compensation, which are currently being kept from the general public’s awareness and to understand why this is being a controversial subject. For example, if we focus on most studies within this area, we will find that the majority of the articles focused on the preference of the stock options as the primary form of compensation, without even addressing the other components or testing the effects together. (Vieito, 2008)
As for the forms of compensation itself, like Gorry, Hassett, Hubbard, and Mathur (2017) have argued, that since 1980 there have been significant changes in the way executives
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are compensated. Not only has there been a tremendous growth in total compensation, but like Bebchuk and Grinstein (2005) and Carola Frydman and Saks (2010) said, options and other forms of incentives represent a greater percentage of the total as far as executive compensation is concerned. In fact, over the last few years, stock option grants are often superior and substitute traditional cash (salary + bonus) compensation, leading to even annual changes in value options constitute gains or losses for the executives holding them. (Brian & Jeffrey, 2000)
Currently, there are many forms of compensation. For Katuscak (2009), executive compensation can be constituted by salary, bonus, restricted stock grants, stock option grants and other compensations such as perquisites, signing bonuses, and severance payments (for the author, “golden parachutes”). However, to facilitate our analysis, we only used the main types of compensation as we see in Figure 1 such as salary, bonus (bonus paid at the same time it is granted), stock options granted and also focused on the value realized on option exercise, restricted stock holdings, LTIP Pay-outs and other types of compensation because tax policy may also end up influencing the total taxable income for forms of compensation that are difficult to tax as private benefits and perquisites. (C. Frydman & Molloy, 2011)
Figure 1 - Main types of executive compensation in mean by year from 1992 to 2016 in thousands of
dollars ($) – Sample of 3135 executives and 117 American firms, the biggest 75 in the years of 1995, 2000, 2010 and 2015. We calculated the mean considering compensation by type and all the executives of the sample in the firms in those years, even if they did not receive anything in some types.Total compensation is defined as the sum of Salary, Bonus, Other Annual, Restricted Stock Grants, LTIP Pay-outs, All Other and Value of Options Exercise.
0 2000 4000 6000 8000 10000 12000
Main types of executive compensation - Mean by year
Total Compensation Total Current Compensation (Salary + Bonus)
Salary ($) Bonus ($)
Options Granted ($ - Compustat Black Scholes value) Value of Option Awards - FAS 123R ($) Value Realized on Option Exercise ($) Restricted Stock Holdings ($)
LTIP Payouts Other Annual
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From a more historical point of view, according to Vieito (2008), until the end of the 80s, or even beginning of the 90s, there was clearly the idea that executives were paid only with salary and bonuses and that the other forms that we saw earlier such as the stock options, were only created at this time as a form of compensation for the performance of the company. Thus, forcing executives to maximize the value of companies and indirectly to improve the situation of shareholders. It should be noted that the restricted stocks only became a known type of compensation in the USA near the year 2000 and they confer the possibility of holding a small part of the company's capital in the future, therefore giving executives greater efforts to increase the market value of the company to be able to exercise their stock options and at the same time give profit to the shareholders. (Smith Jr & Watts, 1982)
A problem closely associated with these types of performance-based compensation, is that executives want to increase the value of the company so much that they often end up lying to the market or even manipulating the accounting data to achieve their goals. (Vieito, 2008)
In a more general form, some authors have pointed to several trends for types of compensation. For example, Bebchuk and Grinstein (2005) argue that during the period 1993-2003, despite the considerable increase in stock-based compensation in both recent and old companies, there was no substitution effect because there was no decrease in the other forms of compensation. Vieito (2008) believed that the significant changes in terms of corporate governance rules only began to be notice as a function of the total percentage of compensation, since the NASDAQ crash in 2000 and essentially from Sarbanes Oxley. It is also argued that the use of stock options has declined and the use of other types of long-term compensation have increased, such as restricted stocks. In fact, this can be seen in Figure 1. The explanation for this, according to the author, is the fact that they differ from the former component of compensation in the sense that they are stocks granted to executives, but that they can only be sold in the long run.
4 Figure 2 - Evolution of the mean by year of Total Compensation and of the marginal tax rate on ordinary income. From years 1992 to 2016. The graphic was done considering the sample of 3135 executives and
117American firms (the biggest 75 in the years of 1995, 2000, 2010 and 2015). The tax rates used to calculate the mean are the taxes applied to each one of the executives per year in the United States.
Looking at all the various forms of executives’ compensation, it is important to analyse how tax rates affect each of the lines and if in fact the options are favourites to the salary + bonus, considering changes in ordinary, corporate and capital gains tax rates (Brian & Jeffrey, 2000). So, if we observe Figure 2, we can see that when in 2002 the marginal tax rate on ordinary income decreases, the average of total compensation increases suggesting an opposite effect thus showing that maybe tax policy could be a possible candidate for the explanation in growth in the level of executive compensation.
Therefore, based on the executives’ compensation and using a set of highly paid executives for the period from 1992 to 2016, this study aims to examine the effect of tax policy.
In the most recent literature, several explanations have been debated on the growth of executive compensation as well as the increase in performance pay. Adding this problem to some studies as Austan Goolsbee (2000); Brian and Jeffrey (2000) and Rose and Wolfram (2002), who find tax effects in the compensation of American executives. A recent and innovative analysis was made from a bigger sample of executives to measure how tax policy affects compensation. We considered the implications of all types of taxes on the various forms of compensation. At the end of this analysis, which combines the current topic of executive compensation with the impact that taxation has on it, great value can be added
0,29 0,31 0,33 0,35 0,37 0,39 0,41 0 2000 4000 6000 8000 10000 12000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar gin al tax ra te C omp en sa tio n (t ho us na ds o f $) Year
Evolution of the mean of total compensation and marginal tax rate on ordinary income
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because there are really few conclusions in relation to a theme that can generate a lot of contributions to the literature. This analysis can also end up making it possible to understand the behaviour of companies with regard to the compensation of their executives and their alterations due to changes in tax rates.
As contributions, these are justified by the simple fact that executives are responsible for a considerable portion of results demonstration and even for the simple fact that with all the easiness of access to varied information, there is still great difficulty in accessing the information associated to the compensation and corporate share. And with this study, it would not only bring to light more knowledge about its form of compensation but would also expose the effects caused by tax policy and would allow scholars to study and develop causal relations so that this subject could be better understood which for the majority of the academic community and entrepreneurs is still unknown.
The rest of the dissertation will continue as follows: Section II presents an overview of the related literature, contextualization and developed hypotheses. Section III presents the sample selection process and criteria, the variables definition and the methodology used in our study. Section IV enumerate and analyse the empirical findings. Lastly, section V and VI respectively present the conclusion and the references consulted for this research.
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II. LITERATURE REVIEW AND RESEARCH
HYPOTHESES
The compensation of executives in the United States has been elevated not only in relative terms, but absolute terms too. In fact, Walker (2013) tells us that these facts are economically significant and have risen sharply in recent decades. So, at this stage, after clearing the main forms of compensation, it is important to find out how taxation affects them. To do so, the following table sets out the type of tax rate applied and when it is taxable for the principal components of executive compensation used in this study and under US federal taxation rules.
Table 1 - Taxation Rules in US.
Over the years some studies like Hite and Long (1982) argue that changes in executive compensation for options are due to changes in tax incentives or Huddart (1998), that found the behaviour of executive compensation sensitive to tax considerations, especially at the time of the tax increase in 1993. Austan Goolsbee (2000) also studied the tax increase in the ordinary income rate in 1993 and found a significant decrease in the performance of corporate executives in response. However, this effect was mostly attributed to changes in the timing of the exercise of stock options, with little long-term effect. More recently, and according to C. Frydman and Molloy (2011), some studies like that of Brian and Jeffrey (2000) argued that differences in tax deductibility, time postponement and tax treatment of various forms of compensation imply that tax policy affects the types of compensation used
Type of Compensation
Tax rate
When is taxable?
Salary Ordinary Pay-out
Bonus Ordinary Pay-out
Dividends Ordinary Pay-out
Stock options Ordinary Exercise date
Restricted stocks, no 83(b)
election Ordinary Restrictions lapse
Restricted stock grant value,
with 83(b) election Ordinary Grant date
Restricted stock gains, with
83(b) election Capital gains Sale of the stocks Unrestricted stock gains Capital gains Sale of the stocks
Incentive stock option (ISO)
and acquired stock gains Capital gains Sale of the stocks Options granted No tax consequences Grant date
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to remunerate executives but attempted to justify this result by saying that it was due to the rise of the stock market in 1992. KatuščáK (2005) entered on this discussion too, contributing to the literature with a theoretical prediction that the higher the tax rate on ordinary personal income is, the smaller the number of options used in the compensation contract are. In the beginning of this decade, further new studies appeared like the study of C. Frydman and Molloy (2011) that using a novel dataset on top American executive compensation since 1946 to 2005, found small evidence for tax rates as an important determinant of executive compensation. Dale-Olsen (2012) studied almost the same question, focusing more on how changes in ordinary tax affect company performance and executive earnings. The results ended in finding evidence that total compensation increases with the increase in the net income tax rate. A year later, Murphy (2013) argued that government intervention had been both a response and a major driver for time trends in compensation of executives over the last century. Bird (2016) also contributed to this question concluding that the tax rules had a small effect on wages or total compensation. Even more recently, Gorry et al. (2017) found that tax rates have a significant impact on the composition of executive compensation. They started from the growing trend toward the use of stock options to examine how tax rates influenced the choice of compensation and documented that deferred income is a significant margin of adjustment in response to changes in tax rates.
Despite these studies that found evidence of changes in executive compensation as a result of changes in tax rates. There are others like Katuscak (2009) and even Brian and Jeffrey (2000) that argue that changes in ordinary income tax rates in the 1980s and early 1990s did not have a significant impact on the composition of executive compensation, particularly as regards the choice between cash payment or stocks. Katuscak (2009) also argued that restricted stocks do not respond to changes in ordinal income tax rates and the Medicare tax rate. Bird (2016) also reached conclusions in this area, arguing that differences in tax incentives are not typically found to be important determinants of executive compensation, noting that non-tax compensation roles such as incentive alignment dominate or at least minimize the effects of tax rates. A similar opinion is that of C. Frydman and Molloy (2011), who state that the level of taxation does not change significantly after the main tax reforms, suggesting that the increase in compensation over time may be due to other factors which led to the huge increase in the highly paid. In fact, the author also finds
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that the strong correlation between tax rates and the level of compensation over time is largely due to long-term trends rather than to high-frequency fluctuations.
In this way and considering the conclusions of the studies mentioned below, it is important to discover whether the changes in tax rates have some impact on executive compensation. Thus, using the main conclusions and considering the correlation between taxes and executive compensation of our sample of American executives it is expected that when ordinary tax rate decreases, the total compensation received by executives increase. To see this trend, we will use a model where we explain the variation of the logarithm of the level of the executive's payment by the variation of the logarithm of the marginal tax rate faced by the top executive. Taking this information into consideration, the first hypothesis is defined by:
H1: When ordinary tax rate increases or decreases, the total compensation received by
executives has the opposite effect but is positively related if we consider the net tax rate. Another relation that we can examine in order to improve our study is almost the same but now focusing on the corporate tax rate and on the capital gains tax rate that we predict will be negative too because an increase in tax rates is always pointed out as a negative factor in total compensation. In this way we formulate:
H2: An increase in tax rate on corporate income leads to a decrease in total compensation
and the opposite effect in case of a decrease in the tax rate.
H3: An increase in capital gains tax rate leads to a decrease in total compensation and the
opposite effect in case of a decrease in the tax rate.
Therefore, after these relations it is important to focus on other aspects of executive compensation, beginning with the same effect but in the major components of executive compensation and understand where the tax effect is more significant, and even if the changes in tax rates can lead to a substitution effect, decreasing for example the compensation by cash and increasing the compensation by stock options. Another question that comes up with the analysis of the related biography, is whether this effect is reflected immediately or a few periods later or even, if it ends up not having a significant effect at all. Considering Xudong and Ligon (2010)’s work, it is also expected that there will be a tax advantage of the options because they argue that cash compensation remained constant
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between 1992-2004, while the compensation in the form of options was significantly higher in this period.
The deferred compensation and the payment in performance are other examples of topics mentioned in related biography that are quite important to this study too; because as Brian and Jeffrey (2000); Hite and Long (1982) state, salary, restricted stocks and options can all be understood as different means of differed compensation while Brian and Jeffrey (2000) refer that, despite the payments in performance that most of the authors refer, the substitution of salaries by stock options was lower.
In view of what we have seen in the mentioned studies it is also important to attend to the long-term relationship that may also be due to other factors such as executives becoming more productive and high tax rates suppressing productivity, which can lead to higher levels of compensation as minor’s tax rates. Another important factor could be the one mentioned in Smith Jr and Watts (1982) study, that large firms generally pay higher dividends and greater compensation to executives than small firms.
With this information and considering the model used, it is difficult to determine the tax effect from the time series correlations because of the numerous omitted variables that C. Frydman and Molloy (2011) state. To assign the effects of tax policy, we calculate the changes in the tax rates faced by those individuals that are attributable exclusively to tax reforms instead of changing the tax bracket and examining the changes in several types of compensation in response to these changes in tax rates.
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I. The impact of tax on salary and bonus
Despite not being discussed so much over the years, some articles have been addressing the tax effects on compensation by salary and bonuses of executives. To that end, studies such as the one by C. Frydman and Molloy (2011) found a small response to salaries, qualified options, long-term incentives or post-retirement bonuses to changes in ordinary income labour tax rates. They also point out in their study that the negative association between executive compensation and salary tax rates exists only in the long run. Other articles such as Krenn (2017) have also contributed to the issue by addressing how corporate profits tax rates and salaries tax rates affect corporate competition by highly competent human resources, particularly in the choice of CEOs. Using a theoretical model, this study has shown that salary tax rates can have a substantial impact on earnings. In fact, like the authors mentioned, many countries even use tax incentives to facilitate the immigration of this type of human resources. This leads to their main conclusion that different salary tax rates have a substantial impact on the outcome of competition between 2 companies. It is also very important to highlight for this study, that Krenn (2017) found a relationship where for CEOs, the gross fixed salaries tend to decrease with an increase in therespective tax rate. However, for Austan Goolsbee (2000) the findings are somewhat different. The study reveals that salaries and bonuses did not fall in response to changes in marginal tax rates while, on the other hand, he found evidence of an increase in untaxed forms of income, thus being significant enough to explain the fall in taxable income from 1992 to 1993. Besides that, it is also important to mention that this study argues that executives without stock options, with relatively low incomes and more conventional forms of compensation such as salary and bonus show little response to changes in tax rates.
Thus, and considering what we have seen before, many studies point out, together with theory that when we see an increase in the tax rate on salary and bonus, compensation in this way decreases and increases the percentage of compensation over other forms.
So, looking at the previous formulation where we examine the relationship between the tax rate and the total compensation, we will do the same thing but now focusing on the total current compensation (salary + bonus) instead of the total compensation. Hence, we can expect the coefficient of the top marginal tax rate on ordinary income to be negative since a decrease in the tax rate (net tax rate increase) should make salaries and bonuses a
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more attractive form of compensation. With all this said, the fourth, fifth and sixth hypotheses are formulated as:
H4: an increase in the ordinary income tax rate leads to a decrease in compensation under
total current compensation defined as the sum of salary and bonus.
The following ones only exist with the purpose of studying the relation separately, in case of different results, so:
H5: an increase in the ordinary income tax rate leads to a decrease in compensation under
salary;
H6: an increase in the ordinary income tax rate leads to a decrease in compensation under
bonus;
Finally, another important aspect that we must keep in mind is that the relationship we are studying is only due to variations in the tax rate and this does not happen frequently.
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II. The impact of tax on the use of options and restricted stocks
Nowadays stock options have become so popular that they are inevitably associated as one of the main methods of compensating executives mostly because of their favourable tax consequences. This is a recent trend since, according to Brian and Jeffrey (2000), the median CEO did not register any stock options until 1985 and it was from 1980 that significant changes began to take place in the way that executives are paid. Thus, for many executives, and in accordance with the law, the conversion of ordinary income of an executive into a capital gain is allowed. This discriminatory provision also raises the question of a possible trend towards tax avoidance. (Edwards, 1960)In addition to the huge increase of all executive compensation, authors like Bebchuk and Grinstein (2005), Carola Frydman and Saks (2010), C. Frydman and Molloy (2011) and Gorry et al. (2017) argue that stock options and other forms of incentive pay now represent a large percentage of all compensation. For example, according to Gorry et al. (2017), between 1992 and 2005, total executive income more than doubled as deferred compensation, which is defined as the sum of the value of the stock options and restricted stocks grants awarded, more than tripled. This trend had already been seen by Huddart (1998), who considered stock options as a growing and increasingly common form of compensation. In fact, with all the growth in compensation, equity compensation was the one growing faster and this growth was not accompanied by a reduction in cash compensation. (Bebchuk & Grinstein, 2005)
This growth in stock compensation has allowed executives to replace cash compensation, which is immediately taxed by compensation where taxation is deferred in years with high tax rates. Some authors also associate a higher percentage of earnings to high-income earners.1
Within executive compensation and focus on options, according to C. Frydman and Molloy (2011) most of the stock options have been nonqualified2, that is, they are taxed as the ordinary income and can claim the deduction of the company as the cash compensation.
1 (Gorry et al., 2017)
2 In a purely tax perspective, in 1971, qualified options ended up being disadvantageous in the face of cash
compensation. In this way, by that time, firms began to replace stock qualified option plans with nonqualified options.
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In this way, it turns out to be relevant to affirm that tax policy had at least a small role in the growth of nonqualified stock options since the 1980s.(A. Goolsbee, 1999), (Brian & Jeffrey, 2000), (KatuščáK, 2005).
Taking other articles into consideration, for example that of Gorry et al. (2017), focus is exclusively on the question of how tax rates affect the initial choice of compensation between cash (salary + bonus) and deferred income while others focus on time decisions, for example Feldstein (1995) who addresses the 1986 tax reform, or Austan Goolsbee (2000); Austan Goolsbee (2000) focusing on the 1993 tax changes, or even C. Frydman and Molloy (2011) whose focus is on a more general approach studying post-war tax reforms; or even that of Dale-Olsen (2012) who focuses on tax changes in Norway and studied the effects on firms and effects on income of executives from more than 11,800 firms.
At this point it is important to highlight the deferral compensation and its advantages when for example there is uncertainty from the workers about future tax rates, thus creating a commonly called option value due to the income they have deferred. In the end, this income turns out to be beneficial because many times certain tax rates are avoided by bringing income over to other periods in which they earn less or even, when capital gains are taxed differently to labour income. Some articles focus on these changes, on the changes in the exercise timing of stock options3 showing that they allow executives to shift their income forward or backward to reduce tax payments when they are anticipated. In this way, deferred compensation (like stock options) can be taxed at the lowest rate. Even with equal tax treatment, deferral allows individuals to earn returns on the pre-tax value of their savings, thus creating incentives to defer income when they face higher rates (Gorry et al., 2017). In a more concrete view of the study, deferred income in C. Frydman and Molloy (2011) is defined as the sum of option awards and restricted stock grants.
In addition, from the perspective of the employer/firm, the tax treatment of stock options can create additional tax incentives through the tax rate. By specifying, in the United States, deferred compensation also ends up allowing the company to generate a larger deduction up to the limit of the "million-dollar rule" in the deduction of the non-based incentive payment.
3 It is important to note that the exercise of stock options is also a mechanism and authors such as Xudong
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Changes in tax rates are now verified by several authors as influences of the executive compensation and the timing of exercise of the vested options, so, to study this relationship we formulated the following hypothesis:
H7: An increase in the tax rate of ordinary income causes a decrease in the compensation
under stock options.
H8: An increase in the tax rate of capital gains causes a decrease in the compensation by
stock options.
It is expected that changes in the tax rate will be negatively correlated with the changes in the compensation by stock options. Knowing that the tax rate faced by the executives is endogenous and knowing that there are a lot of omitted variables that can influence the results, we also used models with fixed effects as we used in salary and bonus specification.
Looking now at some conclusions from other authors, we intend on looking closely at Gorry et al. (2017) study which contrasts with previous articles because they found a strong relation between the tax rates and the type of executive compensation. This strong relation describes a drop in the stock options (-0,403) as a response to an increase of tax rates. A negative relation as we predicted in the hypothesis. Another article that ends up supporting this hypothesis is Bird (2016), this time focused on Canada, suggests that a tax increase results in a reduction of the fraction of the compensation in the form of stock options and also a decrease of stock option grants.
It is also important to highlight the contrasting articles, such as Brian and Jeffrey (2000) which studied the period from 1980 to 1994, addressing the largest American companies and where they conclude that there is a moderate tax advantage for the options and that the changes in tax advantages over time have had at most a modest impact on salary composition. On the other hand, the factors of corporate governance, particularly the role of large investors, seem to be, according to the article, more important in explaining the dramatic increase in the payment of stock options. Authors such as C. Frydman and Molloy (2011) also argue that the effects in question are mainly due to non-tax factors. They studied the effect of tax policy on the level of executive compensation, analysing which changes in ordinary income tax rates influence some components of executive compensation and found a small short-term response. In their study, they also investigate various explanations for the
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different impressions given by long-term and short-term correlations between taxes and wages, including changes in social norms and concerns about pay equity. It is also important to consider Hite and Long (1982) who show that changes in the form of executive compensation for options are due to changes in tax incentives. Austan Goolsbee (2000) also finds a significant decrease in the income taxed by executives in response to the increase of ordinary income tax in 1993. However, they also noticed that this effect can almost be entirely attributed to changes in the timing of stock options exercised with a small long-term effect.
It is important to note that non-qualified stocks are not taxed when granted. Instead, gains from exercising non-qualified stock options are taxed as ordinary income at the time of exercise while future valuations are taxed as capital gains.
In spite of it not being a concrete type of compensation, because it is included in the category of the options, we studied the options realized in each year by the executives in order to establish a relation between the changes in the value of the options realized and the tax rates. As we did not have much information from previous studies about that, we only adapted it to the study of the same 2 hypotheses mentioned above that can be written as:
H9: an increase in the ordinary income tax rate, leads to a decrease in the value of the realized
options;
H10: an increase in the capital gains tax rate, leads to an increase in the value of the realized
options;
Finally, it is also crucial to study the impact of the changes in the tax rates on restricted stocks because as was mentioned before, restricted stocks have been growing over the past years and they today play a significant role in the executive compensation instead of the options as Figure 1 shows. So, bearing in mind Katuscak (2009)’s study argues that restricted stocks do not respond to changes in ordinary income tax rates and in the Medicare tax rate, we have formulated the following hypotheses to investigate if there is any response:
H11: An increase in the tax rate of ordinary income causes a decrease in the compensation
under restricted stocks and increases the compensation in another form or even other forms.
H12: An increase in the capital gains tax rate causes a decrease in the compensation under
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III. The impact of tax rates on the use of other forms of
compensation
Nowadays there are several types of compensation such as perquisites and retirement benefits that are difficult or impossible to observe and therefore, they are not taxed as labour income. However, according to C. Frydman and Molloy (2011), it is possible that these other forms of compensation have responded to changes in tax rates.
An example referred to in C. Frydman and Molloy (2011) study argues that pensions are tax advantaged for a given corporate tax rate, when personal income tax rate is higher since that executives are not taxed until retirement, a period of time when they usually change to a lower income tax bracket. This study also shows that even some authors in the 1950s and 1960s explain that the expansion of executive pension plans is due to the high tax rates.
However, using the award of bonuses to be paid after retirement, these authors also conclude that their results are the opposite of that they argue; that executives with larger decreases in tax have larger increases in retirement bonuses and that there is no significant relation between tax rates and these bonus awards and so they do not depend on tax rates.
As we did not have enough information, such as tenure or salary prior to retirement, to analyse the pensions of the executives in our sample or even the awards mentioned below, we used the Long-term Incentive Plan (LTIP) which is a reward system with the purpose of improving (long-term) performance by providing rewards that sometimes are not attached to the share price of the company. This type of compensation is usually used by executives who have the duty of achieving several conditions or requirements in order to prove their contribution to the increase of shareholder value.
Two main types of LTIP are a 401 (k) retirement plan and stock options. The first one is the one that we will focus on at this point of the study. A 401 (K) retirement plan provides executives with their retirement contributions moving forward once the executive is fully vested. This takes place when a company retains a percentage of the employee’s/executive’s pay-check. Therefore, with this, the employees are more likely to work there until their retirement. 4
4In addition to that, the company usually has a “vesting schedule” that shows the value of the retirement
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Consequently, we expect the coefficient on the tax rate to be positive since an increase in the tax rate of the ordinary income may increase the tax advantage of Long-term incentive pay. Thus, we created the following option:
H13: An increase in the tax rate of ordinary income causes an increase in the compensation
under Long-term incentive pay-outs (LTIP).
At times, focusing on other types of compensation, perquisites and other private benefits is the best option to remunerate executives when the tax is high. However, it is impossible to tax these types because there is a lack of information on them. Apart from the problems with the information needed, the government now pays attention to these types of compensation by analysing the high business expenses. If there is something suspicious, they can force executives to return the excessive amount to the firm or even apply some penalties.
Taking these arguments and difficulties in obtaining data into account, the only way of trying to study these types of compensation in our sample, is to look at the variable “other compensation” or even “all other compensation”, a measure that lumps perquisites with other forms of pay. In our study, we used mostly the variable “all other compensation” because we have 17391 observations against 4992 (only until 2006) and the values are higher. Looking now at the correlations that we have, we see a negative sign when related to top marginal tax rate and which is not consistent with the idea that perks were used more when ordinary income tax rates were higher, however, the evidence is inconclusive because more forms of pay were included in the “other compensation” category in the earlier period. Hence, we formulated our hypothesis by considering that when the marginal taxes on ordinal income are higher, the executives choose to be compensated by perquisites or benefits because they are not taxed or the mere fact that it is very difficult to tax. The same effect is expected with the other taxes. The hypothesis can be written as follows:
H14: An increase in the tax rate of ordinary income causes an increase in the compensation under perquisites or private benefits and consequently under the variable all other compensation.
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III. SAMPLE, VARIABLES AND METHODOLOGY
I.
The Sample
The sample is based on the availability of data because nowadays the executive compensation continues to be a theme that has little data. So, for this study, the data are from Execucomp database, which collects information on the highest-paid executives from over 3600 companies (active and inactive) in the United States. The firms are those (1500 firms per year to be exact) listed on the S&P 500 Index, S&P Mid Cap Index, and S&P Small Cap Index.5
The choice of the sample period, from 1992 to 2016, is related to the database because the first date available was 1992 and the most recent and complete at the time of the study was 2016 to analyse more tax reforms and be able to attribute a relation between these and the executive compensation.
The initial sample covered 3634 firms with 275611 observations and near 12000 firm-year observations. After that, the excluding criteria used is related to complete data, so we excluded all companies with missing data for one or more years from the sample. At this point, we had 586 firms. Finally, and according to C. Frydman and Molloy (2011), instead of choosing the 50 largest publicly-held corporations in 1940, 1960 and 1990 we chose the 75 largest firms (measured with Market Capitalization) in 1995, 2000, 2010 and 2015 (a total of 117 firms). With this, we ended up with a total of 17966 observations and 3135 executives, but only 13 executives had data for all the 25 years. In fact, even in the previous sample of 13978 executives and 586 firms, we only had 94 executives with data in all the years. This happens mainly because a lot of executives leave the firm or come in latter. So, to correct the data, and in order to impute for Eviews we added all the missing years for each one of the executives but without values. Our final sample has 78375 observations. Every company usually has at least 5 executives per year.
5This universe of firms contemplates the firms from S&P 1500 plus firms that were once part of the 1500 and those firms removed from the index that are still trading, and some client requests.
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The data was obtained from Compustat’s Executive Compensation database (Execucomp). The firm-level variables are from CRSP and Compustat and all the data was collected from WRDS (Wharton Research Data Services) and finally tax rates were obtained from SCRIBD and Tax Policy Center.
II.
Variables
The dependent variables are defined as follows: Total Compensation (TOTALCOMP) which is the sum of Salary, Bonus, Other Annual, Restricted Stock Grants, LTIP Pay-outs, All Other and Value of Options Exercise; Total Current Compensation (TOTALCURRENT) defined as the sum of Salary and Bonus; Salary; Bonus that are awarded and paid out in the same year; Restricted Stock Holdings; the Black Scholes value of stock option grants, the FAS 123R value of stock options grants, the value of exercised stock options, the value of other compensation and the long-term incentive pay (bonuses that are received for several years after they are awarded).
With regard to the explanatory variables, we used the tax rate (ordinary, capital gains and corporate), the logarithm of the dependent variable in the previous year, firm-level variables and control variables.
The firm-level variables, and according to C. Frydman and Molloy (2011), are defined as follows: the firm’s net sales/turnover the previous year (SALESPY), the firm’s market value the previous year (MKVALUEPY), the rate of return on the firm’s stock price the previous year (RETURN) to capture past firm growth, the firm’s leverage the year before (LEVERAGEPY) as a result of Total Liabilities/Total Assets and the firm’s market-to-book ratio the previous year (MTBPY) in order to represent growth opportunities.
We initially tried to use other variables such as the executive’s job title the previous year and whether this title changed in the current year, whether the executive was CEO or not in the year prior and whether their status changed in the current year. But our data was not sufficient enough to give significant results.
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III.
Methodology
According to C. Frydman and Molloy (2011) we used a panel dataset at top executive compensation to provide an estimate of the impact created by tax policy on executive pay.
It is now important to highlight that we repeated the same estimation strategy to all the components of executive compensation in order to evaluate this impact, instead of focusing only on total compensation. So, we intend on explaining the change in one type of compensation by relating this to a possible effect on marginal tax rate and to do that, we regress the change in the logarithm in each separate component of executive compensation on the change in the logarithm of the marginal tax rate on ordinary income. Unlike the study of C. Frydman and Molloy (2011) we directly used the marginal tax rate instead of the “net-of-tax rate”, which is given by one minus the marginal tax rate, hence, the signals will be the opposite.
∆ln(compit)= β1 + β2 ∆ln(πit) + β3X it + εit (1) Where π represents the marginal tax rate on ordinary income and X represents the vector of individual and firm characteristics.
Once again, according to C. Frydman and Molloy (2011), we will use the level of pay instead of the share of compensation because we cannot calculate the denominator (mainly due to pensions and perks). It is important to highlight that for these authors the results are similar using one or another as dependent variable.
Considering the problems with the first model related to the use of the marginal tax rate on ordinary income applied for each executive, we used the top marginal tax rate on ordinary income as C. Frydman and Molloy (2011) did too, with the purpose of considering only the changes in taxes related to a tax reform instead of capturing the variations of the taxes paid because of the change to another tax bracket and consequently, a higher or smaller tax rate. Therefore, the model is mostly the same as the one above but with the following alteration:
∆ln(compit)= β1 + β2 ∆ln(ϴit) + β3X it + εit (2) Where ϴ represents the top marginal tax rate on ordinary income and X represents the vector of individual and firm characteristics.
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As this study regarding these topics progressed, we found a way of improving the earlier model. Similar to earlier studies, we added the logarithm of the type of compensation studied, that is the dependent variable, in the previous year to have a stronger model and increase the explanatory capacity. Hence:
∆ln(compit)= β1 + β2 ∆ln(ϴit) + β3 Ln(compitpy)+ β4X it + εit (3) Where ϴ represents the top marginal tax rate on ordinary income and X represents the vector of individual and firm characteristics.
Tax decisions are not only related to the marginal tax rate on ordinary income, and to prove that, we studied almost the same models but changed the tax rate to a capital gains tax rate or top corporate tax rate.
∆ln(compit)= β1 + β2 ∆ln(Ϯit) + β3 X it + εit (4) ∆ln(compit)= β1 + β2 ∆ln(Ϯit) + β3 Ln(compitpy)+ β4X it + εit (5) Where Ϯ represents the top tax rate on corporate income or the capital gains tax rate, the Ln(compitpy) represents the logarithm of the type of compensation used as dependent variable in this model for the previous year and X represents the vector of individual and firm characteristics.
Sometimes, due to the fact that the capital gains tax rate depends on the marginal tax rate on ordinary income, we created and used another model that consists of the two types of tax as explanatory variables. The models can be written as follows:
∆ln(compit)= β1 + β2 ∆ln(ϴit) + β3 ∆ln(Ϭit) + β4 X it + εit (6) ∆ln(compit)= β1 + β2 ∆ln(ϴit) + β3 ∆ln(Ϭit) + β4 Ln(compitpy)+ β5X it + εit (7) Where ϴ represents the top marginal tax rate on ordinary income, Ϭ represents the capital gains tax rate, the Ln(compitpy) represents the logarithm of the type of compensation used as dependent variable in this model for the previous year, X represents the vector of individual and firm characteristics.
It is important to notice that in every model, the εjt is the whitenoise or random disturbance and that we decided to include fixed effects in duplicate models after running
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the Hausman test in order to compare the results with and without fixed effects and to observe if there were any improvements on the model and in the explanatory capacity.
The models are estimated using the OLS – Least Squares method and using the Eviews software.
Foremost, we studied descriptive statistics for all the variables (dependents, explanatory and firm-specific and control variables), analysed the matrix of correlation of variables. Then, estimated the regressions for our sample of executives in the highest American companies for all the compensation and for each one of the components of compensation and even other ways of defining the value of the executive compensation, making it possible to achieve results in the impact and the effects of the main tax rates used in the US on the compensation of the highest executives.
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IV. RESULTS
I. Univariate results
Starting with univariate results, table 2 shows the descriptive statistics for all variables in the entire sample. We analysed mean, median, standard deviation, maximum value, minimum value and the number of observations for dependent and independent variables from 1992 to 2016.
Therefore, considering table 2, we observed that the mean of annual total compensation per executive is considerably higher in our sample, by about 6464 thousand of dollars per year. An interesting result is that the restricted stocks, options granted (whether evaluated by Black Scholes or FAS 123(r)) and the value realized on option exercise have a larger mean by executive per year than the total current compensation which is defined as the sum of salary and bonus. This means that the American executives received great part of their compensation in more complex types of compensation instead of the traditional salary and bonus. As can be seen, this is consistent with Figure 1 and Bebchuk and Grinstein (2005), Brian and Jeffrey (2000), Carola Frydman and Saks (2010) and Vieito (2008).
Another result that is important to bear in mind is that in our sample the mean value of bonus compensation by executive, of 692 993 $, is higher than the mean value of salary compensation (670 196 $). Another dependent variable that also deserves attention is for example the Long-term incentive pay which apart from having less observations due to the data only existing until 2006, has a mean value around 42% of the mean value of salary compensation 283 985 compared to the 670 196 mentioned below. In relation to the other dependent variables, “all other compensation” clearly deserves more attention because there is a higher mean than the other called “other annual” just as it is presented in all the years of the sample, which indicates that it may be in this item that the perquisites and private benefits mentioned in point 4 could be included.
Relatively to the independent variables, at this point it is only important to mention that the mean for the marginal tax on ordinary income for our sample of executives is approximately 0,374 while the top marginal rate is approximately 0,375. This slight difference occurred because we used a sample that has mostly executives which are in the top rate tax bracket. With these results, we can also point out that the marginal tax rate on ordinary income is the highest in our sample followed by the tax rate on corporate income
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(approximately 0,35) and finally by the capital gains tax rate (approximately 0,208). Table 3 includes the mean by year per executive for each one of the types of tax.
Focusing now on the firm-level and control variables, the median leverage in the previous year of the companies in our sample nears 64,7%, the median rate of return on the firm’s stock price nears 0,92%, the median of the firm’s market-to-book ratio in the previous year is approximately 4, the median of the firm’s market value in the previous year is approximately 50519 million and the median value of the firm’s sales in the previous year is 34182 million. In this data we have more observations because they are company data and were added to the whole sample, even those that do not include data for the executives in order to ease the calculations when we used the variables related to the prior year.
Table 4 presents the Pearson’s correlation coefficients in order to understand the correlation between dependent and independent variables. The most relevant results to be noticed are: (i) all the Person correlation coefficients between the dependent and independent variables are relatively small; (ii) total compensation is negatively correlated with top marginal tax rate on labour/ordinary income, which is consistent with the literature review; (iii) total compensation is positively correlated with marginal tax rate on ordinary income as expected. That is why we only used the top tax rate because when the total compensation increases, the executives that were on the lowest tax brackets changed their bracket and consequently paid more tax, making it almost impossible to perform the effect mentioned above; (iv) total current compensation as well as salaries and bonus are negatively correlated with top tax rate on ordinary income which is consistent with hypothesis 4; (v) options granted, restricted stocks and the value realized on options exercise are positively correlated with this tax rate; (vi) the long-term incentive pay and the other types of compensation are negatively correlated with this tax rate that is inconsistent with the hypothesis mentioned earlier on.
There are also results between the same dependent variables but instead of having the top tax rate on ordinary income as independent variable, we related that with the top corporate income tax rate and the capital gains tax rate. Thus, it is important to highlight the negative correlation between the capital gains tax rate and the total compensation as well as the current compensation particularly for the coefficient of the salary and bonus which is near -0,2. In relation to the corporate income tax rate, the results show a positive correlation between the tax and all components of executive compensation.
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Table 2: Summary Statistics
ORDINARY MARG TAX TOP ORDINARY TAX CORPORATE
TAX CGAINS TAX TOPCGAINS TAX PREVIOUSYEAR LEVERAGE PREVIOUSYEAR MTB PREVIOUSYEAR MKTVALUE PREVIOUSYEAR RETURN SALES
Mean 0,3740 0,3746 0,3496 0,2080 0,2081 0,647 4,05 50519,08 34181,78 0,0092 Median 0,3910 0,3910 0,3500 0,2000 0,2000 0,628 3,07 26285,51 16872,00 0,0529 Max. 0,3960 0,3960 0,3500 0,2800 0,2800 1,937 759,59 626550,35 483521,00 5,2674 Min. 0,1000 0,3100 0,3400 0,0000 0,1500 0,000 -264,00 0,00 0,00 -7,1215 Std.Dev. 0,0259 0,0250 0,0018 0,0509 0,0507 0,214 18,40 67615,20 50144,64 0,4217 Skew. -1,04 -0,65 -5,04 0,21 0,22 0,500 26,72 3,13 3,97 -0,5282 Kurtosis 5,99 2,22 26,37 1,64 1,60 4,640 1193,86 16,86 25,68 30,3872 Obs. 17966 17966 17966 17966 17966 75203 75203 75203 75230 78338
TOTALCOMP (Total compensation) is the sum of Salary, Bonus, Other Annual, Restricted Stock Grants, LTIP Pay-outs, All Other and Value of Options Exercise; TOTALCURRENT (Total Current Compensation) defined as the sum of Salary and Bonus; SALARY is the annual salary of the executive; BONUS is defined as the bonus that are awarded and paid out in the same year; OPT GRANTED (BLK SCHOLES) are the options granted evaluated by the Black Scholes value, here we have the average only for 1992-2006 because we did not observe this Black Scholes value of options granted after 2006; OPT GRANTED (FAS 123R) are defined as the options granted evaluated considering the FAS 123R, which we only had data after 2006 justifying the reduced number of observations; RESTRICTED STOCKS are defined as Restricted Stock Holdings($); REALIZED OPTIONS are the value of exercised stock options; LTIP is described as the long-term incentive pay (bonuses that are received for several years after they are awarded), but here we had the Pay-outs; OTHER ANNUAL and ALL OTHER COMP that have the other types of compensation such as perquisites or private benefits. In OTHER ANNUAL and LTIP the same occurs as OPT GRANTED (BLK SCHOLES), there is only data for 1992-2006. MARG TOTALCOMP TOTALCURRENT SALARY BONUS OPT GRANTED (BLK SCHOLES) OPT GRANTED (FAS 123R) RESTRICTED STOCKS REALIZED OPTIONS LTIP ANNUAL OTHER OTHER ALL
COMP Mean 6463,58 1363,19 670,20 692,99 2007,01 1495,49 3579,29 2386,42 283,98 64,09 351,96 Median 2947,24 858,06 577,89 220,00 453,60 610,60 297,05 0,00 0,00 0,00 74,26 Max. 706119,85 43511,54 8303,23 43511,53 600347,35 90693,40 750493,13 706076,91 31325,00 7265,67 100202,14 Min. 2,65 0,00 0,00 -16,50 0,00 0,00 0,00 -99,88 -2360,93 -461,30 -4901,33 Std.Dev. 16297,44 1812,06 436,50 1632,58 8837,98 3928,69 14769,69 12504,01 1097,39 273,04 1746,51 Skew. 19,91 6,78 3,26 7,60 33,95 10,67 21,23 25,39 10,05 12,12 26,68 Kurtosis 649,15 83,76 29,53 103,29 1963,27 165,24 740,76 1069,86 166,48 206,28 1217,58 Obs. 17939 17966 17966 17966 11281 7376 17966 17966 11281 11281 17966
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ORDINARY TAX is defined as the marginal tax on ordinary income and it is calculated considering the total compensation, the tax brackets for an executive filling separately and respectively the taxes; TOP ORDINARY TAX is defined as the top tax rate on ordinary income for each one of the years; CORPORATE TAX is the top tax rate on corporate income; CGAINS TAX is the capital gains tax rate calculated considering the marginal tax rate on ordinary income; TOPCGAINS TAX is used as the top tax rate in capital gains for each one of the years. Finally, the LEVERAGE PREVIOUS YEAR as result of Total Liabilities divided by Total Assets; MTB PREVIOUSYEAR defined as the market-to-book ratio in the previous year and calculated as the market price divided by the book value per share; MKTVALUE PREVIOUS YEAR is the firm’s market value in the previous year and it is calculated as the market price multiplied by the common shares outstanding; SALES PREVIOUSYEAR as the firm’s net sales/turnover in previous year; RETURN is the rate of return on the firm’s stock price in the previous year defined as the log of the ratio between price in year t and year t-1. The sample is based on the highest-paid executives and has 117 firms (the 75 largest firms in 1995, 2000, 2010 and 2015), 3135 executives and 17966 observations from the years 1992 to 2016. The values of the compensation components are in thousands of dollars and the variables market value and sales in millions of dollars.
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Table 3: Mean by year in each type of tax in the United States
The marginal tax rate on ordinary income is the mean by year calculated considering the 117 firms of the sample (the 75 highest firms in 1995, 2000, 2010 and 2015) and the taxes paid in each year by each one of the 3135 executives (the highest paid by firm). The top marginal tax rate on ordinary income is the tax rate applied to someone that is in the last tax bracket, the highest tax rate in each year. The top tax rate on ordinary income is the highest tax rate that the firms could pay in each year. The capital gains tax rate is calculated considering the marginal tax rate on ordinary income and finally the top capital gains tax rate is the highest tax rate on capital gains in each one of the years.
Year rate on ordinary marginal tax income
top marginal tax rate on
ordinary income
top tax rate on corporate income capital gains tax rate top capital gains tax rate 1992 0,310 0,310 0,340 0,280 0,280 1993 0,395 0,396 0,350 0,280 0,280 1994 0,395 0,396 0,350 0,280 0,280 1995 0,395 0,396 0,350 0,280 0,280 1996 0,395 0,396 0,350 0,280 0,280 1997 0,395 0,396 0,350 0,280 0,280 1998 0,395 0,396 0,350 0,200 0,200 1999 0,396 0,396 0,350 0,200 0,200 2000 0,396 0,396 0,350 0,200 0,200 2001 0,390 0,391 0,350 0,200 0,200 2002 0,385 0,386 0,350 0,200 0,200 2003 0,350 0,350 0,350 0,200 0,200 2004 0,350 0,350 0,350 0,150 0,150 2005 0,350 0,350 0,350 0,150 0,150 2006 0,350 0,350 0,350 0,150 0,150 2007 0,350 0,350 0,350 0,150 0,150 2008 0,350 0,350 0,350 0,150 0,150 2009 0,349 0,350 0,350 0,150 0,150 2010 0,350 0,350 0,350 0,150 0,150 2011 0,349 0,350 0,350 0,150 0,150 2012 0,350 0,350 0,350 0,150 0,150 2013 0,395 0,396 0,350 0,237 0,238 2014 0,395 0,396 0,350 0,237 0,238 2015 0,395 0,396 0,350 0,237 0,238 2016 0,396 0,396 0,350 0,238 0,238
