Is Disclosure Good or Bad for Executive Compensation?

Today's Compensation Cafe post is a bit different. It is part blog post and part infographic. In the US, disclosure of executive compensation has been required, in some form, since 1934. Survey data regarding executive compensation has only rocketed to the forefront over the last 30 years. During this period executive compensation has increased at a rate faster than corporate performance, faster than the growth in company size and faster than the stock market.  This gives rise to the question: Is disclosure good for executive compensation?

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Comments

[Joe Rice]

I thought sunlight was supposed to be the best disinfectant. And is it disclosure or how we make use of it that is the problem?

What's interesting is that without public disclosure, you have to think these companies were disclosing through salary surveys, right? If so why wasn't pay moving via that process as rapidly. If you align to company size, industry, etc--with the same comp philosophy in place--why wouldn't pay move at the same (or similar) clip? Is this an indictment on salary surveys as much as it is an indictment on disclosure and exec comp processes?

Oh, and great post!

[Dan Walter]

Thanks for the comment and compliment Joe.

Sunlight is a great disinfectant, but it doesn't work for everything. For example, some wounds, let's say burns, heal better when kept out of the sun.

I agree. The compensation survey process is flawed. It is, though, less personal than disclosure at the executive level.

IO think the big issues is that disclosure, on its own, does not always do what we want it to.

Daniel Ariely, wrote a great post on disclosure of another kind. http://danariely.com/2012/07/09/disclosure-not-good-enough/

We saw some drop in pay over the past few years (take a look at the chart from Forbes near the top of this post). The question is whether this drop was due to the drop in markets or "Say on Pay" votes. We will find out over the next few years (although my guess is on the stock market, not voting.)

[E. James (Jim) Brennan]

Pay WAS moving in lockstep via executive salary surveys in the past. Analyses of size-adjusted surveys even in the 1970s and 80s showed asymptotically improving confidence coefficients as continual constant reference to the same sources by exec comp committee advisors drove the level of agreement up through the 1990s. The dispersion of executive pay by industry and size diminished tremendously over the last fifty years. Competition is more open. Only in the smallest and the fastest-changing firms will you find great variations and high standard deviations.

Remember, pay COMPOUNDS when flat percentages are applied to base rates. And the greater publicity given to outlier cases drives up the norm. No one cites the low-paying cases to justify their next increase. Nobody wants to get "the average" because that's an insult. Everyone deserves an "above average" increase, and the effect of that logic at the top tends to strip an inordinate amount from the available payroll.

In addition, surveys are what they are: reports of specific samples, in most cases. Note that the number of public firms required to reveal their top pay dropped by more than half since the 1970s. Surveys are a whole different and bigger topic, because companies not granting increases tend to avoid survey participation or to compensate their execs with non-cash elements that are less reported and harder to understand even if seen at all. Future articles will appear on that.

[Dan Walter]

Thanks Jim, as always, for a great addition.

As I eluded to in my earlier comment, disclosure without an offsetting control mechanism generally serves the interests of the disclosee (discloser?) more than anyone else.

[Rory Trotter]

Outstanding post, Dan.

Many have touched on this in the topic already, but executive pay continuing to rise is a product of the "ratchet effect" where every company chases the median compensation or higher (in the process raising executive pay for all since by definition all executives are not median or better in performance).

The whole entire peer bench-marking process only even exist because Hay started the process of having executives share their salaries with one another a few decades back as a way to promote their methodology. Ira Kay talks a bit about this in an awesome conversation on executive pay that you can read more about here:

http://www.youtube.com/watch?feature=player_embedded&v=3Jl8ABM1qrE

Thanks for sharing the post. It's extremely well written, and I also love the infographic.

Keep writing.

Best,

Rory

[Marc Hodak]

Very nice infographic. Thanks, Dan.

[Dan Walter]

I thought I'd mention that there is also a great discussion on this topic going on here:

http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=220212622&gid=114051

[Dan Walter]

and another here...

http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=220212622&gid=114051

[Dan Walter]

My Apologies. The second thread is here:

http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=220212569&gid=778987