Academic journal article Journal of Corporation Law

The Paradox of Executive Compensation Regulation

Academic journal article Journal of Corporation Law

The Paradox of Executive Compensation Regulation

Article excerpt

I. Introduction                                                  756 II. The Pay Ratio Discloure and Academic Debates Over Executive     Compensation                                                 758    A. The Academic Debate Over Executive Compensation            758    B. The Pay Ratio Disclosure                                   760    C. The Critique of the Pay Ratio Disclosure                   762    D. The Demand for the Pay Ratio Disclosure                    763 III. An Experimental Examination of the Pay Ratio Disclosure     764    A. Experiment 1: Pay & Performance                            764     1. Methods and Rationale                                     764       a. Hypotheses                                              768     2. Results and Discussion                                    769       a. Preliminary Analyses                                    769       b. Main Analysis I: Pay vs. Performance                    770       c. Main Analysis II: Robustness Tests                      773     3. Summation and Follow-Up Experiment: Public v. Private     776    B. Experiment 2: The Median Pay Ratio                         778     1. Methods                                                   779     2. Results & Summation                                       780       a. Preliminary Analyses                                    780       b. Main Analysis I: Pay, Performance, & the Median Ratio   780       c. Main Analysis II: Robustness Tests                      781       d. Secondary Analysis: Demographic Interaction Models      784 IV. Implications of the Results                                  785    A. The Mixed Effect of Dodd-Frank                             785    B. The Paradox of Executive Compensation Regulation           786    C. Debating the Normative Goals of Regulating       Executive Compensation                                     787 V. Conclusion                                                    788 

I. INTRODUCTION

Executive compensation stands apart from the dreary other topics in corporate law. It is a perennial flashpoint in American politics and a constant--and elusive--target of public regulation. Two broad normative critiques fuel this dogged focus on executive pay, one focused on financial incentives, and the other on progressive morality. These two camps make common cause in regulating executive compensation because they share the belief that the status quo is defective. Their regulatory ambitions have been regarded as compatible, if not complementary. But in this Article we demonstrate that the policies that flow from these two critiques work at cross-purposes, revealing a paradox in the regulation of executive compensation.

The two schools of thought on executive compensation reform are starkly different. The first takes as its touchstone that executive pay should be aligned with performance. Pay practices can and should be used to promote the interests of stockholders in controlling the agency costs at public firms. CEOs whose companies perform well should be paid handsomely, and those whose companies falter should earn less. The absolute level of pay is not relevant. The second critique of executive compensation is rooted in economic justice: absolute levels of CEO pay are obscenely high and should be curbed through regulation.

The fingerprints of both approaches are evident in the regulatory mandates of Dodd-Frank. Two of its corporate governance provisions require that firms disclose information on the linkage between pay and performance and, also, that firms hold stockholder votes on executive compensation. (1) These policies are products of the agency costs tradition.

A different part of Dodd-Frank--section 953(b)--requires a disclosure that has attracted an enormous amount of attention. This is the so-called median pay ratio disclosure requirement, forcing companies to compute and disclose the ratio of the CEO's total compensation to the compensation of the firm's median employee. …

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