Could the Pay Ratio Disclosure Backfire?

Abstract

At the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), President Barack Obama asserted that, “We all win when investors around the world have confidence in our markets. We all win when shareholders have more power and more information. . . . And we all win when folks are rewarded based on how well they perform, not how well they evade accountability.” After the financial crisis in 2008, the Obama Administration recognized the need to reconstruct the existing American financial regulatory system to ensure that a financial meltdown would never happen again. It is quite clear that Congress’s purpose behind the Dodd-Frank Act is to redevelop the financial system to ensure that the 2008 financial crisis will never be repeated. However, the Dodd-Frank Act contains considerable provisions that add substantial new requirements for certain publicly traded companies based in the United States. Analysts have theorized that the creation of new regulations relating to executive compensation and corporate governance was due to assertions that large executive pay contributed to the financial crisis. There has been much debate over whether such changes to executive compensation and corporate governance practices under Title IX of the DoddFrank Act are meeting the intended goals of financial system reform.