Disclosure, Shareholder Oversight and the Pay-Performance Link

Abstract

This paper investigates the effect of increased shareholder oversight and disclosure about executive remuneration on the pay-performance relation, while controlling for contemporaneous changes in corporate governance practice. Our sample consists of 240 ASX-listed firms with annual reports available for each year over the period 2001-2009, a period which straddles the period of regulatory change. We initially document the conjectured improvements in remuneration disclosure and shareholder oversight, in the form of the advisory vote on the remuneration report. Following, we find, as predicted, a general strengthening of the pay-performance relation over the study period, with the increased sensitivity of reported CEO remuneration to firm performance being primarily related to enhanced remuneration disclosure and the non-binding shareholder vote on the remuneration report. Our results lead us to conclude that enhanced oversight over the executive remuneration process brought about by regulatory change has positively impacted the executive remuneration process by strengthening the pay-performance relation and making the process appear more accountable.