Does Income Tax Regulation Apply Downward Pressure to CEO Compensation?

This paper addresses the question of whether Internal Revenue Code §162(m) was effective in decreasing the compensation of chief executive officers of publicly held US corporations. Section 162(m) limited the annual deduction of nonperformance-based executive compensation to $1 million. The stated goal of this section was to limit the compensation paid to corporate executives. This study utilizes the CEO compensation of a sample of 340 publicly traded US corporations for the years 1992-1997. Results indicate that §162(m) was not effective; compensation did not decrease. The most highly paid CEOs, whose salaries were subject to a limited deduction, however, realized smaller increases than their lower-paid peers (whose salaries were fully deductible).