The taxation of bonuses and its effect on executive compensation and risk-taking: Evidence from the UK experience

This paper explores the effects of a bonus tax adopted in the UK in December 2009 on the compensation structure of executives and on risk-taking behavior in the financial sector. Enessive bonuses are blamed for encouraging risk taking and are regarded as one of the pull factors of the financial crisis. The British government attempted to reduce bonuses and accordingly bank risk taking by means of a special tax on cash-based bonuses. Using a comprehensive dataset on executive compensation, we show that the introduction of the bonus tax decreased the net cash bonuses awarded to directors by about 40%, accompanied, however, by a simultaneous increases in other forms of pay leaving total compensation as well as risk levels unaffected.