There's a great article in today's W$J on the persistent failures by government efforts to regulate the compensation of corporate executives. One of the key claims by the article is that disclosure actually tends to push pay up, arguing that "disclosure rules allowed CEOs to see what others were getting, encouraging a competitive spiral." There is a very interesting paper< /a> by Swan and Zhou, however, which was recently posted to SSRN, which argues to the contrary: "We provide evidence contrary to both theories using data on pay levels and incentives pre- and post- disclosure. Disclosure does not appear to alter pay levels but it does enhance incentives."
BLBP comments on the W$J article:
It makes the point that with each new law attempting to control executive pay came "unexpected consequences," executive pay increased. Each law had exceptions for pay that the law makers felt was justified, and companies turned the exceptions into uniform practice, increasing pay.
IN 1984, Congress taxed golden parachutes if over three times salary. Parachutes, rare before 1984, became the norm after 1984 for all companies at -- you guessed it -- three times salary. Now they are over three times salary and the companies pay the tax (gross up provisions). In 1992, the SEC forces companies to disclose more on pay packages; after 1992 salaries skyrocket as CEOs now know what each other make and all demand to be in the "top half", ratcheting up the pay scale. In 1993 Congress caps the deduction for cash salary at $1 million and exempts some kinds of "performance based" compensatory stock options. Before 1993 most executives did not get $1 million in cash, after 1994, all CEO salaries were at $1 million in cash. Now cash salaries over $1 million are common; companies do not worry about the deduction. Compensatory stock option grants soared. By 2001 Larry Ellison took home $706 million in a single year. When FASB finally required the expensing of stock options in 2003, companies began to distribute "restricted stock." Severance payments have soared and golden parachutes, a version of severance payments, are up. Kilts, from Gillette, took home $185 million when he sold Gillette to Proctor & Gamble (and was indignant when anyone suggested that it was too much). Indignant. There is the guts of the problem. The man should be ashamed, or at the very least a wee bit guilty (and thankful for his undeserved good fortune).
Ditto Ideoblog:
The article doesn't mention the effect of changes in takeover regulation, and gives short shrift to the ultimate question of whether executive pay, though rising, is excessive.
My own take is that attempting to regulate agency costs, including pay, within the current corporate form is a losing game because this form inherently gives significant discretion to managers. See Accountability and Responsibility in Corporate Governance, 81 Notre Dame Law Review 1431 (2006). This doesn't mean, however, that pay would be, or should be, lower in alternative business forms that make managers more responsive to markets. Consider, for example, the compensation of hedge fund managers.