Can Compensation Disclosure Cause CEO Pay Escalation?

This paper develops a simple equilibrium model where compensation disclosure causes an escalation in CEO pay. Disclosed information about the pay conditions of peer CEOs reduces the uncertainty in outside options, thus giving CEOs more bargaining power in the negotiation process of their pay package. Specifically, the disclosure of executive compensation triggers a ratchet effect in the mean executive pay within the CEO’s peer group, accompanied by a compression effect in the variability of compensations paid, which slumps in successive increments that taper off over time. Contrary to the conventional wisdom, increased disclosure can cause increased pay.