Executive Compensation: The Fallacy of Disclosure

Incentive compensation has been used through history by those in charge as a means of achieving performance goals and positive financial objectives. Since the early 1990s, the United States Securities and Exchange Commission has approached executive compensation as a matter of disclosure. In 1992, the Commission adopted its new executive compensation proxy disclosure rules; the regulatory changes were adopted in response to complaints that the compensation paid to corporate executives had become excessive, and in the hope that the new regulation could produce an increased shareholder awareness that would make executives more accountable to the shareholders. Data on executive pay shows that SEC-mandated, detailed disclosure of information of executive compensation has not reduced the United States level of compensation of officers. While, arguably, disclosure generates a greater understanding of corporate executive pay for the shareholders, the availability of these numbers constitutes also an enormous advantage for CEOs and CFOs. Indeed, unless paid at a level equal to, or above the market average, a CEO/CFO may well decide to move to a different corporation. This problem makes retention a crucial issue in all public corporations and contributes to further driving executive pay to excessive levels. In addition, the Sarbanes-Oxley has not directly assessed, nor really improved, the mechanisms for compensation. Instead of decreasing excessive executive pay, public knowledge of salaries has created in the United States a sort of "race to the bottom" in which companies have to be willing to pay unjustifiable amounts of money to retain good management. While this history should have shown the Commission that disclosure will not suffice in the area of executive compensation, its staff, once again, has decided to enhance disclosure of executive pay in order to curb the problem of excessive pay packages. This paper argues that there is no reason to believe that enhanced disclosure will produce the desired effect.