The Impact of Deductibility Limits on Compensation Contracts: A Theoretical Examination

• Main Authors: Halperin, Robert M., KWON, Young Koan, Rhodes-Catanach, Shelley C.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2001
• Subjects: Accounting; Corporate Finance; Human Resources Management
• Online Access: https://ink.library.smu.edu.sg/soa_research/672; http://dx.doi.org/10.2308/jata.2001.23.s-1.52
• Institution: Singapore Management University

In 1993, Congress passed Sec. 162(m) of the IRC. This section disallows a deduction for compensation in excess of $1 million paid to the CEO and the 4 highest compensated officers other than the CEO of a publicly traded corporation unless the excess is performance-based. This paper provides a theoretical examination of both firm and executive responses to the deductibility limit imposed by Sec. 162(m). Results of the study may be useful to tax policymakers considering the effectiveness of the section in meeting congressional objectives.