Is Disclosure an Effective Cleansing Mechanism? The Dynamics of Compensation Peer Benchmarking

Abstract:     
Firms regularly justify their CEOs’ compensation by referencing companies with highly paid CEOs with whom they claim to compete for managerial talent. This paper examines whether the 2006 regulatory requirement of disclosing compensation peers has mitigated firms’ opportunistic peer benchmarking of CEO compensation. Our evidence shows that benchmarking manipulation became more severe after enhanced mandatory disclosure, particularly at firms with substantial shareholder complaints about compensation practices, low institutional and director ownership, busy Boards, and large Boards. The effect is the strongest at firms with new CEOs. These findings call into question whether mere disclosure can remedy potential executive compensation abuses.

Number of Pages in PDF File: 50

Keywords: Disclosure Regulation, Corporate Governance, Executive Compensation, Peer Groups, Benchmarking

JEL Classification: G34, J31, J33

working papers series