Disclosure of Executive Compensation Contracts: An Economic Analysis

Abstract

Disclosure of executive compensation schemes has been made mandatory over the past decade in many countries including the UK and the US. Firms however tend not to fully disclose the functional form of their executive compensation schemes. This paper provides a rationale for the lack of voluntary disclosure by firms. It introduces a voluntary disclosure model in which executive compensation solves a moral hazard problem, the resolution of which depends on proprietary information. It provides conditions under which equilibria involving either disclosure or nondisclosure of the executive compensation scheme can obtain and shows that shareholders are better off precommitting not to disclose the executive compensation scheme whenever possible. It establishes that executive directors are better off too in the absence of disclosure of executive compensation schemes. It furthermore shows that mandating the disclosure of executive compensation may not increase the richness of investors' information set.