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

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