This paper investigates the type of tax planning included in tax directors’ compensation contracts. Using detailed data
on tax director incentive compensation, we examine whether the incentives provided to tax directors are associated with
lower effective tax rates and/or a wider book-tax gap. We also examine whether tax director incentives are more strongly
linked to measures of the impact of taxes on cash flows (i.e., cash effective tax rates and taxable income) or earnings (i.e.,
GAAP effective tax rates and pre-tax book income). Finally, we investigate whether tax director incentives are associated
with proxies for aggressive tax planning.
Our study complements and extends the recent literature that links tax planning with top executive incentive
compensation (e.g., Desai and Dharmapala, 2006; Rego and Wilson, 2010) and executive/corporate culture (e.g., Frank
et al., 2009; Dyreng et al., 2010).1 Although these studies show that both the incentives of top management and corporate