Does Tax Deductibility Affect Executive Compensation? Evidence from Obamacare

The enactment of Obamacare in 2013 greatly limits the tax deductibility of performance pay for health insurance companies. Using a difference-in-differences analysis, we find that despite increased after-tax costs, there is limited evidence that the treated firms change the level of total compensation. Focusing on specific compensation components, we find that the treated firms significantly reduce nonequity performance pay, with no significant changes in equity performance pay. Among CEOs, we find some evidence of substitution, with reduced nonequity performance pay accompanied by increased nonperformance compensation. These findings suggest that managing tax liabilities is crucial for executive compensation design, provided that long-term managerial incentives are not compromised. Finally, we find that health insurance companies increase the use of debt after 2013, suggesting that the deductibility of compensation expenses is an important nondebt tax shield. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G32; G30; J33; J41.