New disclosure rules for directors in UK listed companies did not curb CEO pay or improve pay-performance link, but instead led to ‘opportunistic reporting for the sake of reputation management’, says a study by Cambridge Judge Business School and King’s College London. The study found that in submitting comparative information about pay of CEOs and employees, many big UK companies ‘self-select’ by choosing only certain geographies or types of workers – an invitation to ‘cherry-picking’ which ‘seriously compromises the reliability’ of the comparative disclosure rules.
‘Taken together, we question whether the new enhanced disclosure regime is effective in its aim to improve the pay and performance link and curb excessive CEO pay. We conclude that firms engage in impression management by both selectivity in the presentation and content of information.’
The study is authored by Jenny Chu, University Lecturer in Accounting at Cambridge Judge; Aditi Gupta, Lecturer in Accounting at King’s College London and Xing Ge, who worked on the study while attending King’s College London.
Dr Jenny Chu said:
‘We find that the new regulations did not appear to achieve their goal of greater transparency. Companies have such wide discretion as to which employees they include in the comparator information that this disclosure really loses its effectiveness. We also found that in their first year the rules didn’t enhance the link between CEO pay and performance, nor did they reduce the CEO-employee pay discrepancy.’