“Executive Compensation Disclosure and Managerial Incentive Contracts” by Xianming ZHOU
City University of Hong Kong and School of Business University of Sydney
Peter L. SWAN
University of Sydney
This paper examines the regulatory impact of executive compensation disclosure on managerial pay schemes. Utilizing an agency model, we show that government disclosure rules improve the pay-performance relationship by increasing shareholder scrutiny of managerial pay contracts. Furthermore, pay envy of managers acts like a tournament scheme, which enhances incentives and helps tie compensation more closely to performance. Examining CEO compensation for Canadian firms over the years 1991-1996, we find empirical support for this prediction. After the introduction of the new Ontario regulation (October 1993), the linkage between pay and performance was strengthened and, consistent with risk-averse managers, CEOs received higher pay.