Executive Pay Transparency and Relative Performance Evaluation: Evidence from the 2006 Pay Disclosure Reforms
98 Pages Posted: 15 Jan 2020 Last revised: 19 Dec 2020
Date Written: December 18, 2020
Early empirical evidence shows a surprising lack of relative performance evaluation (RPE) for executive pay, giving rise to many potential explanations. We predict and find that executive pay transparency can reduce frictions associated with shareholder monitoring of executive pay that reduce RPE. In particular, we examine RPE over the two decades centered on the 2006 pay disclosure reforms. Firms which increase disclosures are the firms that lack implicit RPE before and implement RPE after the reforms. To further connect pay transparency, shareholder oversight, and RPE, we show increased access to pay disclosures on the SEC EDGAR website after the reforms and that this access positively relates to changes in RPE use. Next, specific disclosures in the 2006 mandate are also related to changes in RPE use, including peer and performance metric disclosures. Lastly, say-on-pay voting is consistent with shareholders expressing support for RPE.
Keywords: Corporate Governance, Executive Pay, Regulation, Relative Performance Evaluation
JEL Classification: G38, J33, J38, M12, M41
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