Does Disclosure affect CEO Pay Setting? Evidence from the Passage of the 1934 Securities and Exchange Act

Abstract

Using newly digitized data from the Federal Trade Commission, I examine the evolution of executive compensation during the Great Depression, before and after mandated pay disclosure in 1934. I find that disclosure did not achieve the intended effect of broadly lowering CEO compensation. If anything, and in spite of popular outrage against compensation practices, average CEO compensation increased following disclosure relative to the upper quantiles of the non-CEO labor income distribution. Pay disclosure coincided with compression of the CEO earnings distribution. Following disclosure there was a pronounced drop in the residual variance of earnings—computed with size and industry controls—that accounts for almost the entire drop in the unconditional variance. The evidence suggests an upward “ratcheting” effect whereby lower paid CEOs given the size and industry of their firm experienced relative gains while well paid CEOs conditional on these characteristics were not penalized. The exception is at the extreme right tail of the CEO distribution, which fell precipitously, suggesting that disclosure may only have restrained only the most salient and visible wages.