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Tax effects on the design of managerial compensation systems

Grant number: 13/19182-1
Support type:Scholarships in Brazil - Doctorate (Direct)
Effective date (Start): January 01, 2014
Effective date (End): February 28, 2015
Field of knowledge:Applied Social Sciences - Administration - Accounting
Principal researcher:Andson Braga de Aguiar
Grantee:Cláudio Soerger Zaro
Home Institution: Faculdade de Economia, Administração e Contabilidade (FEA). Universidade de São Paulo (USP). São Paulo , SP, Brazil

Abstract

This study aims to identify the impact of the influence of taxation on incentives capacity of compensation plans. Based on the theory of trade-off and also on agency literature it is expected that the choice for tax purposes have a negative effect on incentives, whereas a preference for more intense incentives effects generate higher tax costs. Therefore it is believed that companies that emphasize incentive compensation purposes will contain higher proportions of payments via stock options, annual bonus, long-term plans and participation in profits or results, respectively. While companies that prioritize tax purposes in determining the forms of remuneration will contain higher proportions of participation in profits or results, stock options, bonuses and regular long-term plans in this order. Moreover, it is expected that, due to more levels of monitoring and also due to the lack of accuracy of stock options for hierarchical lower levels, the emphasis will be on incentives purposes when referring to executive compensation while it prioritizes tax purposes in the remuneration of business unit managers. For the empirical analysis of this relationship data will be collected through questionnaires and experiments. The main expectation is that tax effects are important in determining how the compensation occurs, especially regarding the choice for profit/gain sharing and that this influence will reduce the incentive capacity of the compensation plan. (AU)

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