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Disclosure of Executive Compensation

Is it a good idea for companies to disclose their CEO's compensation package?

Many decades ago, the United States' Securities and Exchange Commission (SEC) made it mandatory for companies to disclose what they were paying to their Chief Executive Officer (CEO). This was done in the interest of the shareholders, who collectively, are the silent owners of the company. The SEC rightly contemplated that shareholders have a right to know what the person running their company is earning.

At the time (early in the 20th century) when the disclosure rule was put in place, the CEO's salary was a reasonable few notches higher than the workers who actually "ran" the company and did all the work. At the time, the CEO's remuneration actually made sense. The CEO was a leader who made tough decisions and captained the company in the direction of prosperity. Being the head of the organization, the CEO was understandably paid more than everyone else. A study found that CEO salaries were quite stable prior to the implementation of the disclosure rule.

Fast forward to the 21st century and the CEOs compensation packages have skyrocketed into the stratosphere. The highest paid CEO in 2008 earned over US$700,000,000! In a ploy to mislead the company's shareholders, the CEO's base salary was only US$350,000; the rest of his salary came in the form of bonuses, stock options and other incentives. I have discussed this trick to fool the shareholders here.

Today's CEO's salary is not just a few notches above the workers salary, but at least 1000 times higher than a worker's salary. One explanation for why this has happened has to do with the SEC making it mandatory to disclose CEO compensation. A study on executive compensation found that CEO salaries have been consistently going up since that rule was put in place. The explanation provided is that disclosure made it possible for CEOs to know what CEOs of competitor companies were earning. This lead to competition in salaries, which in turn lead to a rise in salaries.

I think it will probably be a good idea if we, once again, go back to an era where CEO compensation was not disclosed. It will probably ease the pressure on salaries to rise.

What do you think?

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