Two Essays on Executive Incentives: The Compensation Weight Placed on Tax Performance and Revenues, Their Causes and Consequences

Date
2017
Authors
Liu, Hanni
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Abstract

This dissertation includes two essays on executive compensation policies.

The first study investigates two research questions: first, how can compensation committees incentivize executives, particularly chief executive officers (CEOs), to engage in tax avoidance; and second, do credit-rating agencies consider executive incentives that encourage tax avoidance? Previous studies conclude that debtholders consider tax avoidance risky and consequently require higher costs of debt (Ayers et al. 2010, and Hasan et al. 2014). This study provides direct evidence linking CEOs’ incentives to avoid taxes and their effect on credit ratings. Moreover, it investigates why a compensation committee may encourage tax avoidance given debtholders’ concerns. The results of this study suggest that credit-rating agencies lower ratings if companies incentivize their CEOs to avoid taxes. The results also suggest that compensation committees incentivize CEOs to adopt tax avoidance strategies after evaluating potential costs and benefits. Finally, the results suggest that good corporate governance can mitigate increased credit risks caused by incentives to avoid taxes.

The second study examines the role of accounting information in CEO cash compensation. Specifically, we focus on the compensation weight placed on revenues in companies engaging in corporate social responsibility (CSR). CSR expenses may affect earnings negatively and lower manager performance measures. However, research provides consistent evidence that shareholders benefit from CSR (Dhaliwal et al. 2011 and Kim et al. 2012). This study therefore conjectures that these companies reward their managers by placing a higher compensation weight in revenues since revenues are less affected by CSR expenses. Ultimately, the compensation weight of revenues depends on their sensitivity, nosiness, and congruity to shareholder payoff (Lambert and Larcker 1987, Banker and Datar 1989, Feltham and Xie 1994). This study tests the hypotheses by first finding if the revenue-return association and revenue quality are higher in these companies. It then examines the compensation weight of revenues and find consistent results. This study is important because it underlines the role played by revenues in executive contracting and shows how compensation committees adjust compensation weight to better reward CEOs.

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Keywords
Compensation Weight, Corporate Social Responsibility, Credit Rating, Executive Compensation, Revenues, Tax Avoidance
Citation
Department
Accounting