Executive Pay for Luck: New Evidence Over the Last 20 Years

Abstract

Early empirical evidence showed a lack of relative performance evaluation (RPE) for executive pay, a surprise given its theoretical appeal. We predict and find that director shirking reduces RPE use, and executive pay transparency can enhance shareholder monitoring of company boards and increase RPE use. We examine RPE over the two decades centered on the 2006 executive pay reforms, which required disclosures that shareholders could use to monitor pay plans. Firms that increase disclosures exhibit a significant improvement in RPE use after the reforms relative to other firms. To further connect board-shareholder frictions and oversight with pay transparency and RPE, we show four results. (i) Sales targets set by inattentive boards are more likely to lack RPE features. (ii) Shareholders want RPE, evidenced by say-on-pay voting. (iii) Access to pay disclosures on the SEC website increases after the reforms, and this access positively relates to changes in RPE use. (iv) RPE increases occur for firms with inattentive boards before the reforms and with more shareholder engagement after the reforms.