Does Executive Compensation Disclosure Alter Pay at the Expense of Incentives?

45 Pages Posted: 23 Jun 2006

See all articles by Xianming Zhou

Xianming Zhou

Australian National University

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: June 21, 2006

Abstract

According to the "keeping up with the Jones" theory promulgated by compensation consultants, compensation disclosure is responsible for increases in executive pay levels. Jensen and Murphy (1990a), however, contend that disclosure is responsible for a decline in performance pay, as public scrutiny penalizes boards that provide incentives resulting in high payouts. We provide evidence contrary to both theories using data on pay levels and incentives pre- and post-disclosure. Disclosure does not appear to alter pay levels but it does enhance incentives. Our findings suggest failure in managerial incentive contracts when pay is opaque to shareholders.

Keywords: CEO compensation, disclosure, regulation, contracts, pay levels, pay sensitivity

JEL Classification: G34, G38, J33

Suggested Citation

Zhou, Xianming and Swan, Peter Lawrence, Does Executive Compensation Disclosure Alter Pay at the Expense of Incentives? (June 21, 2006). Available at SSRN: https://ssrn.com/abstract=910865 or http://dx.doi.org/10.2139/ssrn.910865

Xianming Zhou

Australian National University ( email )

Canberra, Australian Capital Territory 2601
Australia

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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