The enhanced disclosure of executive compensation in Korea

Abstract

In Korea, with the amendment of the Financial Investment Services and Capital Markets Act (FISCMA) in 2013, the disclosure rule of executive compensation has been enhanced. The new legislation requires listed firms to disclose pay information for registered directors who earn more than 500 million Korean won in compensation per year. Using individual compensation data, we investigate whether the amended disclosure rule affects compensation level and pay–performance relation. We find no reduction in executive pay level. Rather, executives receive higher compensation after the enhanced disclosure rule. We also find that for executives who earned less than the optimal pay level in the ex ante period, pay growth rates are higher in the ex post period, suggesting that the availability of information about others' pay level affects pay changes for directors in the lower pay group. Moreover, the enhanced disclosure rule brings little improvement in pay–performance relation. Pay–market performance link has improved only for firms with good governance. Our results suggest that compensation disclosure rules need to be accompanied by good governance mechanisms in order to achieve effective compensation systems.