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

Faulkender, Michael W.; Yang, Jun

doi:10.2139/ssrn.1786109

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

50 Pages Posted: 15 Mar 2011 Last revised: 14 May 2014

See all articles by Michael W. Faulkender

Michael W. Faulkender

University of Maryland - Robert H. Smith School of Business

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

There are 2 versions of this paper

Date Written: March 14, 2011

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.

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

JEL Classification: G34, J31, J33

Suggested Citation: Suggested Citation

Faulkender, Michael W. and Yang, Jun, Is Disclosure an Effective Cleansing Mechanism? The Dynamics of Compensation Peer Benchmarking (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1786109 or http://dx.doi.org/10.2139/ssrn.1786109