Did Tax Reform Influence the Prevalence of Nonfinancial Compensation Incentives?
In this study, I examine whether taxes influence the structure of executive compensation incentives. Recently, the Tax Cuts and Jobs Act (TCJA) removed the requirement that bonus plans be tied to objective and verifiable performance measures for the bonus to be tax deductible. A potential consequence of this removal is that firms may begin to rely more heavily on nonfinancial performance measures in their bonus arrangements. I find an increase, post TCJA, in both the number of and the weight applied to nonfinancial performance measures. These changes impacted important outcomes I find an increase in both investor and information uncertainty for firms increasing their use of nonfinancial performance metrics following the TCJA. I also find that the increase in nonfinancial metrics leads to improvements in sustainability outputs (actions aimed at environmental, social, and governance activities) Overall, the results suggest that the recent tax reform facilitated the inclusion of additional nonfinancial performance measures in executive bonus plans, leading to greater investor and information uncertainty.