Form Over Substance? An Investigation of Recent Remuneration Disclosure Changes in the UK

Abstract

In 2013 new regulations that required enhanced disclosure in remuneration reports were enacted in the UK. Using a sample of FTSE 100 companies from 2011-2013, this paper:

1) describes voluntary and mandated disclosure behaviour in response to the enhanced disclosure requirements; and

2) examines the subsequent effect of mandated disclosure on executive remuneration and firm performance.

We find that voluntary disclosure was more focused on presentation over substantiative content changes. In addition, mandatory disclosure on relative increase in Chief Executive Officer (CEO) and employee pay was subject to management discretion, as firms could self-select their employee comparator groups. Moreover, mandated disclosure in the first year of the post-reform period did not enhance the link between CEO pay and firm performance, nor curb the degree by which CEO pay was in excess of the average salary earned by employees. The difference between change in total shareholder returns and change in pay also did not improve in the mandated disclosure period. Therefore the new disclosure regime did not result in a fairer pay in society or promote a fairer distribution of profit. Finally, firms that had higher prior advisory dissent votes on pay continued to reward their CEOs with higher total and cash pay, and continued to have high CEO-to-employee pay ratios. Taken together, we question whether the new enhanced disclosure regime is effective in its aim to improve the pay and performance link and curb excessive CEO pay.

Keywords: Remuneration reporting, Voluntary Disclosure, Executive Remuneration, Pay-performance Sensitivity, Corporate Governance, Say on Pay

JEL Classification: G3