Executive Compensation: Is Disclosure Enough?

Abstract

Over the last decade, executive compensation has attracted the attention from corporate governance specialists and the general public. After briefly examining the purposes of executive compensation, this paper focuses on the governance problems posed by remuneration schemes. It considers the limitations of the traditional bargaining by the board approach and the weakness of the traditional means of control by shareholders. It then focuses on disclosure as the main regulatory answer to this problem. Analyzing closely the Swiss regulatory framework, it points out its formal and substantive shortcomings. It also takes a step back and undertakes a more fundamental critique of disclosure as a remedy to inappropriate compensation. It stresses the perverse incentives resulting from a disclosure scheme, ranging from the use of inefficient but opaque forms of remuneration to the ratcheting effect and the norm setting effect of disclosure. To solve these problems and more generally to improve executive compensation, it suggests putting more focus on shareholders through a general meeting vote on compensation policy and explores a few options so that this vote can become an effective check on executive compensation.