Executive Pay Transparency and Relative Performance Evaluation: Evidence from the 2006 Pay Disclosure Reforms

70 Pages Posted: 15 Jan 2020 Last revised: 18 Oct 2021

See all articles by Jung Ho Choi

Jung Ho Choi

Stanford University Graduate School of Business

Brandon Gipper

Stanford University Graduate School of Business

Shawn Shi

Stanford Graduate School of Business

Date Written: October 16, 2021

Abstract

Early empirical evidence showed a lack of relative performance evaluation (RPE) for executive pay, a surprise given its theoretical appeal. We predict and find that director shirking reduces RPE use, and executive pay transparency can enhance shareholder monitoring of company boards and increase RPE use. We examine RPE over the two decades centered on the 2006 executive pay reforms, which required disclosures that shareholders could use to monitor pay plans. Firms that increase disclosures exhibit a significant improvement in RPE use after the reforms relative to other firms. To further connect board-shareholder frictions and oversight with pay transparency and RPE, we show four results. (i) Sales targets set by inattentive boards are more likely to lack RPE features. (ii) Shareholders want RPE, evidenced by say-on-pay voting. (iii) Access to pay disclosures on the SEC website increases after the reforms, and this access positively relates to changes in RPE use. (iv) RPE increases occur for firms with inattentive boards before the reforms and with more shareholder engagement after the reforms.

Keywords: Corporate Governance, Executive Pay, Regulation, Relative Performance Evaluation

JEL Classification: G38, J33, J38, M12, M41

Suggested Citation

Choi, Jung Ho and Gipper, Brandon and Shi, Shawn, Executive Pay Transparency and Relative Performance Evaluation: Evidence from the 2006 Pay Disclosure Reforms (October 16, 2021). Stanford University Graduate School of Business Research Paper No. 3509307, Available at SSRN: https://ssrn.com/abstract=3509307 or http://dx.doi.org/10.2139/ssrn.3509307

Jung Ho Choi

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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(650)721-8434 (Phone)

Brandon Gipper (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)498-4350 (Phone)

Shawn Shi

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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