The sky-high pay of American CEOs often feels invincible. The New York Times recently walked readers through how Elon Musk’s “landmark” compensation plan, which linked his pay to ambitious Tesla profit targets, has so far not only given him nearly $60 billion, but also spawned copycat pay packages that have made other CEOs richer, further widening the gap with workers. Amazon, meanwhile, just got reamed for CEO Andy Jassy’s $212 million pay package: a $175,000 base salary, the rest entirely performance-based, but all told equaling 6,474 times the median worker’s salary. Proxy advisory groups have started urging investors to speak out against pay packages this outlandish, but last year shareholders voted against just 67 of the top 3,000 public companies’ proposals.
But what about efforts on the other end to discourage companies from awarding such lavish pay? Specifically, have attempts by the government to check CEO compensation worked?
A new study by a group of researchers at Indiana University, the University of Texas, and University of Chicago’s Booth School of Business says no, not really.
They looked at a recent attempt that got perhaps the most press: the 2017 Tax Cuts and Jobs Act. It was a law full of tax reforms that Republicans and conservative think tanks hyped as President Trump’s “signature achievement.” One reform was an attempt to curb CEO pay by removing an exemption enacted in the early Clinton years that allowed companies to deduct performance-based executive compensation from their taxes. The study, published by the journal Contemporary Accounting Research, relied on more than 40 tests to measure changes in CEO pay for 2017, 2018, 2019, and 2020. By examining pay packages before and after the Trump tax reforms, they could measure if, and by how much, amounts changed in total dollar figures, the mix in compensation types, and what they call “pay-performance sensitivity.”
The authors write that the Tax Cuts and Jobs Act had nearly zero effect. Executive compensation has by and large stayed right where it was prior to the law penalizing companies for awarding high compensation.
“Even three full years after the law took effect, we didn’t see any evidence of a reduction in CEO pay,” says one of the authors, Bridget Stomberg, an Indiana University associate accounting professor who also cohosts the podcast Taxes for the Masses with fellow coauthor Lisa De Simone. In many cases, they found pay jumped even more.
Stomberg says it may be good politics right now to say, “Tax corporations to reduce income inequality,” but that their research suggests taxes “are just not a big enough stick to change the structure or the magnitude of executive compensation.”
The compensation consulting firm Equilar recently released a separate study showing that even run-of-the-mill, non-Musk executives are earning record-breaking salaries. Median CEO pay for 2021 hit $32.1 million, up 27% from the previous year when that figure was “only” $25.3 million.
The paper’s authors encourage lawmakers to rethink if higher taxes are a path toward achieving pay equality. If Congress overstates the role higher taxes play in how companies structure executives’ pay packages, then Congress’ “ability to shift current compensation practices through changes in tax policy is also likely overstated,” the researchers say, adding that “increases in firms’ cost of executive compensation do little to reduce its amount.”
Correction: An earlier version of this story described Bridget Stomberg as lead coauthor of the study. All authors contributed equally to the paper.