CONTENTS LIST OF CONTRIBUTORS vii EDITORIAL BOARD ix AD HOC REVIEWERS xi AIT STATEMENT OF PURPOSE xiii THE EFFECT OF EXPORT TAX INCENTIVES ON EXPORT VOLUME: THE DISC/FSC EVIDENCE B Anthony Billings, Gary A McGill and Mbodja Mougoué IMPLICATIONS OF BENCHMARK STATE AND LOCAL TAX RATES FOR MEASURES OF ESTIMATED IMPLICIT TAXES Bradley D Childs 29 TAX ADMINISTRATION PROBLEMS: GAO-IDENTIFIED SHORTCOMINGS AND IMPLICATIONS Philip J Harmelink, Thomas M Porcano and William M VanDenburgh 43 IMPLICIT TAXES AND PROGRESSIVITY Harvey J Iglarsh and Ronald Gage Allan 93 THE ASSOCIATION OF CAREER STAGE AND GENDER WITH TAX ACCOUNTANTS’ WORK ATTITUDES AND BEHAVIORS Suzanne Luttman, Linda Mittermaier and James Rebele v 111 vi THE DETERMINANTS OF STAFF ACCOUNTANTS’ SATISFACTION WITH SERVICES AT KOREAN DISTRICT TAX OFFICES Tae sup Shim 145 TAX POLICY EFFECTIVENESS AS MEASURED BY RESPONSES TO LIMITS PLACED ON THE DEDUCTION OF EXECUTIVE COMPENSATION Toni Smith 173 LIST OF CONTRIBUTORS Ronald Gage Allan Office of Student Financial Services, Georgetown University, USA B Anthony Billings Department of Accounting, Wayne State University, USA Bradley D Childs College of Business Administration, Belmont University, USA Philip J Harmelink Department of Accounting, University of New Orleans, USA Harvey J Iglarsh McDonough School of Business, Georgetown University, USA Suzanne Luttman Leavey School of Business, Santa Clara University, USA Gary A McGill Fisher School of Accounting, University of Florida, USA Linda Mittermaier Accounting Department, Capital University, USA Mbodja Mougou´ e Department of Finance and Business Economics, Wayne State University, USA Thomas M Porcano Department of Accountancy, Miami University, USA James Rebele Rauch Business Center, Lehigh University, USA Tae sup Shim Department of Tax and Accounting, Incheon City College, South Korea vii viii Toni Smith Department of Accounting and Finance, University of New Hampshire, USA William M VanDenburgh Department of Accounting, Louisiana State University, USA EDITORIAL BOARD EDITOR Thomas M Porcano Miami University ASSOCIATE EDITOR Charles E Price Auburn University Kenneth Anderson University of Tennessee, USA Beth B Kern Indiana University-South Bend, USA Caroline K Craig Illinois State University, USA Suzanne M Luttman Santa Clara University, USA Anthony P Curatola Drexel University, USA Gary A McGill University of Florida, USA Ted D Englebrecht Louisiana Tech University, USA Janet A Meade University of Houston, USA Daniel P Murphy University of Tennessee, USA Philip J Harmelink University of New Orleans, USA Charles E Price Auburn University, USA D John Hasseldine University of Nottingham, England William A Raabe Ohio State University, USA Peggy A Hite Indiana University-Bloomington, USA Michael L Roberts University of Alabama, USA ix x David Ryan Temple University, USA Dan L Schisler East Carolina University, USA Toby Stock Ohio University, USA AD HOC REVIEWERS James R Hasselback Florida State University, USA Robert C Ricketts Texas Tech University, USA Ernest R Larkins Georgia State University, USA Patrick J Wilkie George Mason University, USA xi STATEMENT OF PURPOSE Advances in Taxation (AIT) is a refereed academic tax journal published annually Academic articles on any aspect of federal, state, local, or international taxation will be considered These include, but are not limited to, compliance, computer usage, education, law, planning, and policy Interdisciplinary research involving, economics, finance, or other areas is also encouraged Acceptable research methods include any analytical, behavioral, descriptive, legal, quantitative, survey, or theoretical approach appropriate for the project Manuscripts should be readable, relevant, and reliable To be readable, manuscripts must be understandable and concise To be relevant, manuscripts must be directly related to problems inherent in the system of taxation To be reliable, conclusions must follow logically from the evidence and arguments presented Sound research design and execution are critical for empirical studies Reasonable assumptions and logical development are essential for theoretical manuscripts AIT welcomes comments from readers Editorial correspondence pertaining to manuscripts should be forwarded to: Professor Thomas M Porcano Department of Accountancy Richard T Farmer School of Business Administration Miami University Oxford, Ohio 45056 Phone: 513 529 6221 Fax: 513 529 4740 E-mail: porcantm@muohio.edu Professor Thomas M Porcano Series Editor xiii THE EFFECT OF EXPORT TAX INCENTIVES ON EXPORT VOLUME: THE DISC/FSC EVIDENCE B Anthony Billings, Gary A McGill and Mbodja Mougou´ e ABSTRACT This article examines the sensitivity of U.S exports to the availability of export incentives offered under the Domestic International Sales Corporation (DISC) and the Foreign Sales Corporation (FSC) provisions of U.S tax law Evidence on the efficacy of export tax incentives is mixed The history of the DISC/FSC tax incentives provides a natural experiment to address the question of the effect of tax incentives on export volume We examine the relation of U.S export volume to the availability of these export tax incentives from 1967 to 1998, controlling for product class and important macroeconomic variables, and find evidence of a positive association between the level of U.S exports and the existence of the export incentives offered under the DISC/FSC provisions However, this association depends on product type Our findings using actual export data are independent of otherwise available data demonstrating a general growth in the use of DISC/FSC entities and the sales volume of these entities The latter data suffer from an interpretation problem because changes in the number of special export entities used and their sales volume not necessarily correlate with changes in actual export levels over time The approach we use in this study is an attempt to overcome Advances in Taxation Advances in Taxation, Volume 15, 1–28 © 2003 Published by Elsevier Ltd ISSN: 1058-7497/doi:10.1016/S1058-7497(03)15001-6 ´ B ANTHONY BILLINGS, GARY A McGILL AND MBODJA MOUGOUE this limitation The reported results have implications for both tax policy regarding the design of export tax incentives and the European Union’s claim that U.S export tax incentives have damaged U.S competitors in foreign trade INTRODUCTION Research suggests that national governments can help private industry increase its global market share of products under imperfectly competitive market conditions The set of available governmental actions includes: (1) imposing tariffs on imports; (2) funding technological innovation; (3) forming export cartels; and (4) offering export incentives.1 This article examines the sensitivity of U.S exports to the availability of export incentives offered under the Domestic International Sales Corporation (DISC) and the Foreign Sales Corporation (FSC) provisions of U.S tax law Evidence on the efficacy of export tax incentives is mixed U.S critics argue that such provisions constitute an unwarranted tax benefit to U.S exporters with little or no real contribution to improving the U.S balance of trade position Conversely, the European Union (EU) has long argued that these tax incentives represent an illegal trade subsidy and that their existence has damaged U.S competitors in world trade In the midst of this ongoing controversy regarding the influence of export tax incentives, very little research has addressed the relation of these U.S tax incentives to actual export activity (as opposed to growth in the use of these tax-favored export entities).2 The history of the DISC/FSC tax incentives provides a natural experiment to address the question of the effect of tax incentives on export volume We examine the relationship of U.S export volume to the availability of these export tax incentives for the time period 1967–1998, controlling for product class and important macroeconomic variables The results provide evidence on whether U.S tax policy has assisted the U.S private sector in maintaining or increasing its export market share We find evidence of a positive association between the level of U.S exports and the existence of the export incentives offered under the DISC/FSC provisions However, this association depends on product type The remainder of this article is organized as follows Section provides an overview of the DISC/FSC provisions and a review of the literature that provides a framework for examining our research question We define the research variables in Section 3, describe the method of analysis in Section 4, and present the results in Section Section provides sensitivity tests, and Section concludes the paper Tax Policy Effectiveness as Measured by Responses to Limits 181 Compij = 0 + 2 EARNij + (2) Compij = 0 + 3 PRICEij + (3) where, Compij = Executive compensation for firm i, year j; SGij = Sales growth for firm i, year j; EARNij = Accounting earnings for firm i, year j; PRICEij = Stock price for firm i, year j; and ij = error term for firm i, year j Sample The sample is composed of those firms listed on the 1994 Fortune 500 (Fortune, 1995) 1994 was selected because it was the year in which the legislation under investigation first became effective If a firm responded to RRA 93, then the initial reaction probably will occur in the first effective year Unlike previous studies, which focused exclusively on the CEO (Balsam & Ryan, 1996; Harris & Livingstone, 1998; Rose & Wolfram, 2000) and defined compensation as the sum of salary and bonus (Harris & Livingstone, 1998; Healy et al., 1987), the current study examines the total compensation paid to a group of key employees This data set represents an important contribution to the literature because it comprehensively examines the compensation components and employees covered by this legislation Hypothesis tests use data from Compustat and from the Summary Compensation Table contained in the 1992–1997 proxy statements DEF 14A, as filed with the Securities and Exchange Commission (SEC) and available online through the SEC’s EDGAR database The Summary Compensation Table contains salary, bonus, number stock options granted, long-term incentive payouts and general categories of other compensation for each firm’s CEO and the four next-highest paid executives (SEC, 1993) Only those companies filing electronically with the SEC are included in the EDGAR database The specific variables used in this research are the compensation amounts paid to the chief and named executive officers (CEO and NEOs) of each firm Data limitations permit analysis of the CEO and the three next-highest paid officers only Because the fourth-highest paid NEO was not consistently reported by the sample firms, that employee is not included in the analysis Another limitation is related to the nature of the data source itself All compensation information was retrieved from online sources Firms not filing electronically for all years of the study, therefore, may have supplied incomplete information 182 TONI SMITH Table Study Sample Final Sample Number of Firms Fortune listing 500 Outlier Changed fiscal year end Stock not publicly traded Merged or split up during 1992–1997 Data not available through EDGAR or Compustat 10 25 120 Sample tested 340 (in the context of the current research) As noted above, the insufficient data often precluded the inclusion of at least one executive in the research database To remove the effects of general price level changes, dollar denominated amounts are deflated by the consumer price index (1992 = 100).5 Further, all of the data exhibit strong skew As the statistical methods used to test the hypotheses assume that the underlying data are normally distributed, log transformations were performed prior to testing In addition to removing one outlier firm, other firms were removed on the basis of incomplete data Those companies that changed fiscal years or corporate structure (by merger or split up) also were removed from the sample These firms were removed because in at least one year, they reported partial periods that could not be incorporated with the other reported time periods Table contains information about the sample firms The final data set consists of 340 firms, or 68% of the population firms Testable time periods were established based on the first effective year of §162(m) The compensation limitations first applied to years beginning on or after January 1, 1994 Accordingly, for firms with calendar year ends, year 1, the initial year of effectiveness, is the accounting period ending on December 31, 1994 For all firms with fiscal year ends, year is the accounting period ending in 1995 As a result, year could be 1994 or 1995 Effective years, and the periods for which data have been collected, are identified in Table Statistical Tests This research relies on a variety of statistical analyses Testing the first and second hypotheses utilizes analysis of variance (ANOVA) techniques to compare the means of each pre- and post-enactment year Oneway ANOVA is appropriate for Tax Policy Effectiveness as Measured by Responses to Limits 183 Table Effective Years Effective Year Accounting Period Calendar Year End −2 −1 Fiscal Year End 1992 1993 1994 1995 1996 1993 1994 1995 1996 1997 this analysis because it is used to compare each of the five annual means of the compensation measures Also, the ANOVA tests are well suited to this analysis because they, unlike other statistical methods (Kazmier, 1988), are not impaired by the small number of years (five) examined To further investigate the ANOVA results, Tukey’s HSD cell-wise comparisons are made These comparisons extend the ANOVA and are effective because they stratify the years (treatments) into homogeneous groups based on mean values Evaluation of the composition of these groups and their means indicates both the point (year) at which a statistically significant change occurs and the direction (increasing or decreasing) of the shift While some multiple comparison tests are limited to paired data (i.e least significant differences), Tukey’s method is well suited to this (5-year) data set because it examines all possible groupings (Box et al., 1978) and is not dependent upon equal sample sizes when there are three or more treatments (Daniel & Terrell, 1992) Ordinary least squares (OLS) regression analysis is used to test the third hypothesis Specifically, individual OLS regressions are produced for each year and each performance measure Additional regression analyses are performed on the pre- and post-RRA 93 periods as well A combined examination of  and R2 indicates size and importance, respectively, of performance measures in executive compensation RESULTS Hypotheses and The first and second hypotheses analyze the mix of compensation components by examining the weights of salary and bonus in the compensation package (excluding stock options) Weights attributable to salary and bonus payments are computed by separately dividing each variable by total cash compensation Total 184 TONI SMITH Table CEOs Panel A: Anova Results Variable Degrees of Freedom Salary/Total cash compensation Bonus/Total cash compensation F 17.624 5.837 4 p-Value 0.000 0.000 Panel B: Tukey HSD Homogeneous Subsets Effective Year Salary/Total Cash Compensation n Subset for ␣ = 0.05 −2 −1 Sig 340 340 340 340 340 Bonus/Total Cash Compensation n 52% 42% 39% 0.38 44% 42% 0.76 47% 44% 0.46 1.00 Subset for ␣ = 0.05 340 340 340 340 340 27% 31% 0.05 31% 33% 33% 32% 0.59 Note: Total Cash Compensation = (Salary, Bonus, Other annual, Long-term incentive payout, Restricted stock awards and All other) cash compensation is defined as the sum of salary, bonus, other annual, restricted stock awards, long-term incentive payouts, and all other compensation The statistical tests show that, for all executives, the weight of salary compensation decreased while the weight of bonuses increased during the five-year period For the four executives examined, the results of ANOVA and Tukey tests6 are notably similar Tables 3, 4, 5, and report the ANOVA results (Panel A) and subset means (Panel B) for the CEO, 1st NEO, 2nd NEO and 3rd NEO, respectively Of note is the composition of the post-RRA 93 salary subsets and the pre-RRA 93 bonus groups; in general, stratification occurs around the enactment of RRA 93 The CEO’s salary experiences the most gradual increases As reported in Table 3, the CEO’s salary is divided among four homogenous subsets While an abrupt shift around the enactment of RRA 93 is not found, gradual change toward performance-based remuneration is apparent Demarcation of salary weights in pre- and post-RRA 93 years is clearer for NEOs As reported in Tables 4, Tax Policy Effectiveness as Measured by Responses to Limits 185 Table Highest-Paid NEOs Panel A: Anova Results Variable Degrees of Freedom Salary/Total cash compensation Bonus/Total cash compensation F 11.687 3.558 4 p-Value 0.000 0.007 Panel B: Tukey HSD Homogeneous Subsets Effective Year Salary/Total Cash Compensation n Subset for ␣ = 0.05 −2 −1 Sig 340 340 340 340 340 Bonus/Total Cash Compensation 46% 44% 41% 0.07 47% 46% 44% 0.10 n 52% 47% 0.07 Subset for ␣ = 0.05 340 340 340 340 340 26% 30% 30% 0.08 30% 31% 30% 30% 0.92 Note: Total Cash Compensation = (Salary, Bonus, Other annual, Long-term incentive payout, Restricted stock awards and All other) and 6, for all NEOs a single homogeneous subset captures all post-enactment years (effective years 1, and 3) The second subset for all NEOs appears to be a transitional period The first subset consistently contains both pre-RRA93 years and the highest salary percentages The weight of bonus continually increases throughout the five-year time frame examined in the current research These increases, however, are slightly more difficult to assess Year −2 is consistently the lowest and the overall weight increases are between and 6% during the five-year time period For two NEOs, however, the high point occurs in year 1, when §162(m) first became effective Both the 1st and the 2nd NEO reached a peak bonus percentage (31%) in year That rate then decreased slightly, down to 30%, in years and Even with this decrease, however, bonuses for the highest-paid and second highest-paid NEOs became a larger part of these individuals’ compensation package Table provides an additional measure of support for the first hypothesis Salaries, even after adjusting for inflation, have increased for all executives; 186 TONI SMITH Table Second Highest-Paid NEOs Panel A: Anova Results Variable Degrees of Freedom Salary/Total cash compensation Bonus/Total cash compensation F 4 p-Value 9.690 4.123 0.000 0.003 Panel B: Tukey HSD Homogeneous Subsets Effective Year Salary/Total Cash Compensation n Subset for α = 0.05 −2 −1 Sig 340 340 340 340 340 Bonus/Total Cash Compensation 48% 46% 45% 0.46 51% 48% 0.46 n 54% 51% 0.24 Subset for α = 0.05 340 340 340 340 340 26% 29% 0.07 29% 31% 30% 30% 0.78 Note: Total Cash Compensation = (Salary, Bonus, Other annual, Long-term incentive payout, Restricted stock awards and All other) during the five years studied, the CEO’s salary has increased by 11% overall, the 1st NEO’s 6%, the 2nd NEO’s 8%, and the 3rd NEO’s 9% The bulk of those increases, however, occurred very early, between effective years −2 and −1 The later years witness little or no gains The CEO’s salary, in fact, decreased from effective year to effective year The first and second hypotheses are supported because increases in the weights of bonus are accompanied by decreases in the weights of salary This result provides a degree of evidence that is consistent with legislative effectiveness regarding the performance-based objectives of compensation reform Specifically, the mix of components has shifted in favor of performancebased, rather than entitlement, amounts Assessing the performance-based goals, however, is a two-part test While the first and second hypotheses are supported, the effectiveness of the deduction limitations with regard to performance-based objectives also must incorporate the results of the third hypothesis test Tax Policy Effectiveness as Measured by Responses to Limits 187 Table Third Highest-Paid NEOs Panel A: Anova Results Variable Degrees of Freedom Salary/Total cash compensation Bonus/Total cash compensation F 4 p-Value 9.836 4.517 0.000 0.001 Panel B: Tukey HSD Homogeneous Subsets Effective Year Salary/Total Cash Compensation n Subset for ␣ = 0.05 −2 −1 Bonus/Total Cash Compensation 332 332 332 332 332 51% 49% 48% Sig 0.19 n 53% 51% 49% 0.16 56% 53% 0.09 Subset for ␣ = 0.05 332 332 332 332 332 26% 29% 0.06 29% 30% 30% 30% 0.89 Note: Total Cash Compensation = (Salary, Bonus, Other annual, Long-term incentive payout, Restricted stock awards and All other) Hypothesis The third hypothesis continues the examination of the performance-based objectives of the deduction limitations Regression analysis separately examines the relationships among three performance measures and total cash compensation and number of options granted Descriptive statistics for the three independent Table Salary Increases Year Annual Percentage Increase in Inflation-Adjusted Salary −1 CEO 1st NEO 2nd NEO 3rd NEO Overall 7% 3% 6% 5% 3% 3% 2% 3% 2% 1% 0% 0% −1% 0% 0% 1% 11% 6% 8% 9% 188 TONI SMITH Table Descriptive Statistics (Performance Measures, N = 340) Descriptive Statistics Effective Year −2 EARN (Millions $) Mean Std Dev −1 212.8 1,555.7 398.9 879.9 504.1 919.6 473.2 911.7 647.9 998.6 26.9 14.1 28.1 14.7 27.3 14.5 31.4 18.0 34.4 20.2 34.7 1,310.9 148.6 1,481.1 509.2 1,949.0 470.1 1,708.6 389.9 2,192.0 PRICE ($) Mean Std Dev SG (Millions $) Mean Std Dev EARN = Accounting earnings; PRICE = Stock price; and SG = Sales growth variables are presented in Table As with all monetary compensation variables, performance measures were deflated by CPI (1992 = 0) These deflated values, however, were highly skewed To remove the skew, natural log transformations were made and used in the regression analyses that follow This analysis, the results of which are reported in Tables 9–12, provides modest evidence in support of the legislative goals of strengthening the pay-performance link Specifically, total cash compensation appears to be related to EARN Table CEOs (Regression Analysis) Effective Year EARN  (Sig.) PRICE R2  (Sig.) SG R2  (Sig.) R2 Total cash compensation −2 0.193 (0.000) −1 0.197 (0.000) 0.265 (0.000) 0.282 (0.000) 0.252 (0.000) 0.138 0.141 0.224 0.238 0.198 0.125 (0.059) 0.174 (0.016) 0.273 (0.000) 0.375 (0.000) 0.309 (0.000) 0.011 0.017 0.041 0.085 0.053 0.110 (0.001) 0.113 (0.004) 0.105 (0.000) 0.169 (0.000) 0.102 (0.001) 0.048 0.039 0.052 0.137 0.045 Number of options granted −2 0.206 (0.000) −1 0.057 (0.083) 0.056 (0.000) 0.056 (0.000) 0.062 (0.074) 0.067 0.014 0.077 0.077 0.012 −0.092 (0.494) −0.232 (0.105) 0.010 (0.944) 0.168 (0.168) −0.264 (0.077) 0.002 0.010 0.000 0.007 0.011 0.198 (0.002) 0.042 (0.054) 0.139 (0.009) 0.208 (0.000) 0.051 (0.467) 0.064 0.002 0.033 0.068 0.003 EARN = Accounting earnings; PRICE = Stock price; and SG = Sales growth Tax Policy Effectiveness as Measured by Responses to Limits 189 Table 10 Highest-Paid NEOs (Regression Analysis) Effective Year EARN  (Sig.) PRICE R2  (Sig.) SG R2  (Sig.) R2 Total cash compensation −2 0.220 (0.000) −1 0.190 (0.000) 0.257 (0.000) 0.254 (0.000) 0.237 (0.000) 0.156 0.139 0.224 0.186 0.164 0.148 (0.024) 0.153 (0.023) 0.215 (0.001) 0.204 (0.004) 0.400 (0.000) 0.015 0.015 0.031 0.025 0.086 0.152 (0.000) 0.101 (0.005) 0.107 (0.000) 0.162 (0.000) 0.108 (0.001) 0.085 0.037 0.067 0.130 0.045 Number of options granted −2 0.212 (0.000) −1 0.151 (0.004) 0.252 (0.000) 0.172 (0.001) 0.202 (0.000) 0.080 0.034 0.086 0.046 0.055 −0.230 (0.054) −0.016 (0.885) −0.016 (0.897) −0.031 (0.781) −0.157 (0.224) 0.015 0.000 0.000 0.000 0.005 0.218 (0.000) 0.099 (0.121) 0.145 (0.004) 0.194 (0.000) 0.098 (0.077) 0.085 0.014 0.039 0.073 0.017 EARN = Accounting earnings; PRICE = Stock price; and SG = Sales growth and PRICE EARN, in particular, is significant for all executives in all years Coefficients increase and range from 0.190 to 0.282 In addition, this relationship, while not particularly powerful, has strengthened over time While R2 peaks briefly around effective year one (above 0.22 for all executives) and then decreases slightly, the general trend is increasing Table 11 Second Highest-Paid NEOs (Regression Analysis) Effective Year EARN  (Sig.) PRICE R2  (Sig.) SG R2  (Sig.) R2 Total cash compensation −2 0.222 (0.000) −1 0.203 (0.000) 0.252 (0.000) 0.259 (0.000) 0.266 (0.000) 0.207 0.190 0.269 0.229 0.258 0.184 (0.002) 0.191 (0.002) 0.222 (0.000) 0.276 (0.000) 0.382 (0.000) 0.029 0.029 0.039 0.055 0.097 0.108 (0.001) 0.007 (0.023) 0.098 (0.000) 0.164 (0.000) 0.106 (0.000) 0.056 0.022 0.062 0.150 0.055 Number of options granted −2 0.187 (0.000) −1 0.156 (0.004) 0.228 (0.000) 0.209 (0.000) 0.180 (0.000) 0.060 0.035 0.069 0.060 0.048 −0.222 (0.045) −0.083 (0.488) −0.044 (0.714) 0.092 (0.394) −0.063 (0.593) 0.016 0.002 0.000 0.003 0.001 0.183 (0.001) 0.116 (0.064) 0.138 (0.005) 0.244 (0.000) 0.097 (0.071) 0.067 0.020 0.037 0.119 0.018 EARN = Accounting earnings; PRICE = Stock price; and SG = Sales growth 190 TONI SMITH Table 12 Third Highest-Paid NEOs (Regression Analysis) Effective Year EARN  (Sig.) PRICE R2  (Sig.) SG R2  (Sig.) R2 Total cash compensation −2 0.206 (0.000) −1 0.200 (0.000) 0.257 (0.000) 0.253 (0.000) 0.254 (0.000) 0.198 0.202 0.292 0.245 0.272 0.118 (0.045) 0.186 (0.002) 0.206 (0.001) 0.296 (0.000) 0.437 (0.000) 0.012 0.028 0.034 0.065 0.139 0.081 (0.007) 0.057 (0.080) 0.088 (0.000) 0.167 (0.000) 0.106 (0.000) 0.035 0.015 0.053 0.165 0.067 Number of options granted −2 0.195 (0.000) −1 0.123 (0.015) 0.230 (0.000) 0.196 (0.000) 0.177 (0.000) 0.063 0.025 0.073 0.058 0.049 −0.128 (0.273) 0.032 (0.785) 0.129 (0.300) 0.032 (0.773) −0.081 (0.469) 0.005 0.000 0.004 0.000 0.002 0.180 (0.002) 0.125 (0.039) 0.160 (0.001) 0.210 (0.000) 0.090 (0.092) 0.059 0.025 0.052 0.089 0.016 EARN = Accounting earnings; PRICE = Stock price; and SG = Sales growth For both PRICE and EARN, reported values of R2 are small (ranging from 0.011 to 0.165), but generally increase over the time period examined The coefficient on PRICE, however, increases markedly For the third highest-paid NEO, for instance, the PRICE coefficient increased from.118 to.437 (R2 increased from 0.012 to 0.139) Unlike EARN and PRICE, the SG coefficients, while significant, did not exhibit appreciable increases; values were stable and near 0.10 in most cases Tests of the first and second hypotheses demonstrated that executive compensation is shifting toward bonus and away from salary payments The tests of the third hypothesis reveal that the link, albeit a modest one, between compensation and performance (as measured by net income and stock price) is strengthening With regard to option grants, however, no link with performance is revealed by the regression analyses While option grants have become more popular and increased in number annually during the five-year period (Fig 2), they not appear to be related to performance The variables tested, especially PRICE, tend to be insignificant This result is a direct contrast to the legislative perception that options appear de facto to meet the performance-based criteria of §162(m) (U.S House of Representatives, 1993) However, this analysis is based on the number of options granted annually rather than a monetary valuation An examination of the monetary value attributable to stock options may lead to different conclusions Tax Policy Effectiveness as Measured by Responses to Limits 191 Parsing Data for Pre- and Post-§162(m) Analyses An additional transformation of the data set was made so that, as was done with the first two hypotheses, the third hypothesis could be tested on the pre- and post-§162(m) years separately Table 13 contains the results of testing the data on these two data sets Again, the independent variable PRICE is largely insignificant; p-values range from 0.001 to 0.693, both before and after the enactment of RRA 93 SG, however, consistently increased in significance after the enactment, but the coefficient of this variable indicates only very slight increases For the highest-paid NEO, in fact, the coefficient of SG actually decreased after the imposition of the new compensation guidelines Table 13 Regression Analysis, Pre- and Post-§162(m) Period Intercept  Sig EARN  Sig PRICE  R2 SG Sig  Sig CEO Pre-§162(m) Post-§162(m) Total cash compensation 12.856 0.000 0.171 12.613 0.000 0.254 0.000 0.000 0.045 0.019 0.495 0.693 0.059 0.057 0.028 0.001 0.14 0.25 CEO Pre-§162(m) Post-§162(m) Number of options granted 10.397 0.000 0.125 10.392 0.000 0.228 0.024 0.000 −0.174 −0.242 0.212 0.024 0.074 0.083 0.163 0.035 0.04 0.07 1st NEO Pre-§162(m) Post-§162(m) Total cash compensation 12.237 0.000 0.173 12.172 0.000 0.243 0.000 0.000 0.052 0.018 0.427 0.711 0.077 0.057 0.004 0.001 0.15 0.24 1st NEO Pre-§162(m) Post-§162(m) Number of options granted 9.582 0.000 0.124 9.538 0.000 0.243 0.014 0.000 −0.179 −0.255 0.140 0.004 0.103 0.095 0.038 0.005 0.05 0.10 2nd NEO Pre-§162(m) Post-§162(m) Total cash compensation 12.006 0.000 0.187 11.835 0.000 0.238 0.000 0.000 0.088 0.039 0.124 0.362 0.032 0.058 0.169 0.000 0.19 0.27 2nd NEO Pre-§162(m) Post-§162(m) Number of options granted 9.509 0.000 0.106 9.388 0.000 0.208 0.050 0.000 −0.227 −0.287 0.056 0.001 0.107 0.115 0.028 0.000 0.05 0.10 3rd NEO Pre-§162(m) Post-§162(m) Total cash compensation 11.977 0.000 0.191 11.670 0.000 0.245 0.000 0.000 0.067 0.032 0.247 0.431 0.013 0.048 0.579 0.001 0.19 0.30 3rd NEO Pre-§162(m) Post-§162(m) Number of options granted 8.952 0.000 0.071 9.057 0.000 0.180 0.181 0.000 −0.081 −0.203 0.494 0.024 0.127 0.124 0.008 0.000 0.04 0.09 EARN = Accounting earnings; PRICE = Stock price; and SG = Sales growth 192 TONI SMITH As with previous analyses, the most notable results are associated with the net income variable (EARN) Without exception, both the significance of and the value of the coefficients related to EARN increased during the post-§162(m) period Specifically, all coefficients were significant (p-values of 0.000) in the post-§162(m) years The values of the coefficients increased substantially in some cases This finding provides further support of the general conclusion that the strength of the pay-performance link, especially that related to net income, increased after the enactment of RRA 93 CONCLUSIONS, IMPLICATIONS, LIMITATIONS AND FUTURE RESEARCH This study has empirically examined the responses of 340 U.S corporations to the Revenue Reconciliation Act of 1993 and IRC §162(m) The two primary goals of RRA 93, to apply downward pressure to compensation payments and to alter the shape of remuneration packages, are investigated Both total cash compensation and the number of options granted annually continued to increase for the group of key executives during the five-year period examined in the current research Continually rising compensation levels are reflections of increases in many forms of remuneration (i.e salary, bonus, other and long-term incentive payouts), and have implications for future research Specifically, executive compensation research that does not include all forms of remuneration may represent only a partial analysis; to fully investigate the topic, all components of compensation plans merit consideration The evidence found is consistent with an increased reliance on bonus, or performance-based, payments by firms after the enactment of RRA 93 Further, evidence also is consistent with RRA 93’s goal of strengthening the payperformance link While total compensation does not decrease, it does, however, appear to be more closely tied to performance in the years after the enactment of RRA 93 than it was previously The stronger link, however, is a modest one and primarily applies to the relationship between firm net income and total cash compensation The relationship between the number of stock options granted and performance, however, shows no real signs of strengthening during the five-year period examined The modest nature of this conclusion has implications for ongoing policy discussions related to the deduction of executive compensation In February of 1999 (H.R 740), and again in 2001 (H.R 2691), for instance, the Income Equity Act [of 1999 and 2001] was introduced in the U.S House of Representatives This bill was reintroduced in 2001 (H.R 2691) This bill, if Tax Policy Effectiveness as Measured by Responses to Limits 193 enacted, would apply to U.S corporations and would further limit (in addition to §162(m)) the deduction of salary, wages and bonuses paid to any employee to 25 times the pay of the lowest compensated employee (U.S House of Representatives, 1999) Notably, the terms of H.R 740 not apply to categories of other compensation or stock option grants The goal of this particular legislation appears to be that of reducing the absolute dollar amount of salary and bonus payments Based on the results of the current study, however, these legislative efforts (H.R 740 and 2691) are not well placed because compensation appears to be resistant to changes in the tax law Additional research should consider modifications to the underlying data First, the valuation of options, which is not included in the current research, would provide considerable information regarding the overall compensation packages of the firms under investigation Similarly, the inclusion of the fourth highest-paid NEO, an employee excluded from the present analysis, would provide additional information regarding the full effects of RRA 93 Finally, the investigation of additional performance measures in the analysis of the pay-performance link would provide additional information NOTES As recently as April 2002, the Senate Finance Committee met to examine the issue of executive compensation (Digest, 2002) The SEC’s Shareholder Proposal Rule allowed those owning $1,000 worth of stock for at least one year to submit issues for vote by the corporation’s shareholders Upon submission, the corporation would have to circulate the shareholder’s proposal in its proxy statement unless the topic qualified for an exception Executive pay was considered a legitimate exception to this circulation procedure As a result, corporations could, at their discretion, ignore shareholder proposals concerning executive compensation (Levin, 1991) Statistical tests of the compensation decreasing objectives were preformed and results of those tests reveal that compensation did not decrease after the imposition of §162(m) The method of combining compensation amounts in years when more than one CEO was in office did not affect the results of the hypotheses tests Statistical tests were repeated on the smaller (n = 217) group of CEOs, and the results were similar in all cases While all monetary amounts have been deflated to remove the effects of inflation, this adjustment is small In general, the consumer price index (CPI) rose in a slight, yet consistent manner throughout the time period covered by the current research The range of annual CPI increases was limited to 2.3–3.0% On average, the CPI increased approximately 2.8% annually during the years currently under examination Prior to conducting the statistical tests of the first and second hypotheses, t-tests were used to assess whether or not differences exist when the pre-§162(m) years (years −2 and −1) are compared to post-§162(m) years (years 1, 2, and 3) For all executives, large t-values, which range from −7.1 to 3.9, and the corresponding levels of significance, all very near zero, indicate the means of the two periods are significantly different 194 TONI SMITH ACKNOWLEDGMENTS This paper is based on my dissertation at Case Western Reserve University I thank my committee, Tim Fogarty (chair), Rob Bricker, Julia Grant, and Tom Love I also appreciate the helpful comments of two anonymous referees, workshop participants at the University of New Hampshire, the University of Pittsburgh, and the 2000 American Accounting Association Annual Meeting REFERENCES Balsam, S., & Ryan, D H (1996) Response to tax law changes involving the deductibility of executive compensation: A model explaining 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American Economic Review, 90(May), 197–202 U.S House of Representatives (1993) “Conference report” on the Revenue Reconciliation Act of 1993 (H Rept 103–213) (August 4) U.S House of Representatives (1999) Income Equity Act of 1999 (H R 740) (February 11) U.S House of Representatives (2001) Income Equity Act of 2001 (H R 2691) (July 31) ... volume not necessarily correlate with changes in actual export levels over time The approach we use in this study is an attempt to overcome Advances in Taxation Advances in Taxation, Volume 15, ... local, or international taxation will be considered These include, but are not limited to, compliance, computer usage, education, law, planning, and policy Interdisciplinary research involving, economics,... governmental actions includes: (1) imposing tariffs on imports; (2) funding technological innovation; (3) forming export cartels; and (4) offering export incentives.1 This article examines the sensitivity