The determinants of compensation report transparency: manager incentives and firm characteristics

Summary

The research paper "The determinants of compensation report transparency: manager incentives and firm characteristics" by Pfeiffer and Jarchow (2024) delves into the factors influencing the level of disclosure in executive compensation reports. The study focuses on a German setting, examining data collected between 2006 and 2014. The authors utilize a hand-collected dataset comprising 429 observations to assess how various compensation, governance, and ownership variables affect the quality of transparency in these reports. They acknowledge the inherent conflict of interest, where managers often have incentives to conceal compensation details from shareholders. Contrary to what the managerial power theory might suggest regarding opportunistic reporting incentives, the study's overall findings indicate that a lack of detailed disclosure is not primarily driven by managers' self-serving efforts to obscure excessive pay. Instead, managers tend to avoid extensive disclosures because it demands additional effort from them. The empirical analysis identifies four principal determinants of disclosure: company size, age, the presence of family members on the boards, and verticality. Interestingly, other variables such as proprietary costs, general governance characteristics, and firm performance show no or only an unstable influence on disclosure quality. The transparency, or lack thereof, is thus presented as a combination of available company resources (e.g., larger size and forecasts correlate with increased disclosure), owner interests (e.g., family members on the board are associated with decreased disclosure), and concerns about potentially infringing on social equity (where higher pay inequity leads to lower disclosure). The average disclosure score in the sample was approximately 40%, indicating that, on average, less than half of the possible information was actually provided in compensation reports.