Executive compensation incentives influence firms’ conforming tax avoidance, research finds

The line between tax avoidance and tax evasion is often very thin.

“What we’re showing is that one unintended consequence of executives’ compensation contract design is lower profits, and this leads to lower taxes paid. But if you’re a shareholder whose only concern is maximizing profits, you’re potentially shooting yourself in the foot, depending on how you’re designing this contract.”

A new paper, “Equity incentives and conforming tax avoidance”, by Jack Kramer Term Associate Professor Michael Mayberry, Assistant Professor Scott Rane and the University of Kansas’ Mehmet Kara finds that the risk-incentivizing component of option compensation (i.e., vega) is positively associated with conforming tax avoidance, while value-creation component of option compensation (i.e., delta) is negatively associated with conforming tax avoidance. The paper also shows that the negative association between delta and conforming tax avoidance is predominantly driven by risk aversion rather than value creation.

Read more in this story from the University of Kansas.