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Discretion in Financial Reporting: The Voluntary Disclosure of Compensation Peer Groups in Proxy Statement Performance Graphs

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  • JOHN W. BYRD
  • MAILYN F. JOHNSON
  • SUSAN L. PORTER

Abstract

We examine the 49 Standard & Poor's (S&P) 500 firms that voluntarily disclosed in their 1993 proxy statements, the composition of the comparison group used by each board's compensation committee to set executive compensation policies. We hypothesize that the net benefits of this disclosure are largest when (1) there is a high degree of stakeholder concern about compensation, (2) compensation policies are defensible, and (3) corporate governance is strong. Consistent with our stakeholder concern prediction, disclosing firms have higher compensation levels and are more apt to have received prior shareholder proposals about executive compensation. Contrary to this prediction, we find a negative association between financial press coverage of compensation policies and the probability of disclosure. Additionally, the disclosure decision is unrelated to the defensibility of compensation policies and the firm's corporate governance profile. Industry†adjusted firm performance, managerial entrenchment, CEO tenure, institutional holdings, and compensation committee independence variables are insignificant. We also compare the financial performance and compensation practices of compensation peers to two yardsticks — performance and pay practices at the sample firms and the corresponding S&P industry index firms. The compensation levels of compensation peers exceed those of the firms in the corresponding S&P industry indexes. Because (1) compensation levels and performance sensitivities at sample firms are more similar to those at compensation peers than to those at S&P industry index firms, and (2) the superior financial performance and higher performance sensitivities of disclosing firms justify high pay, this evidence suggests that the compensation peers of disclosing firms are an appropriate comparison group.

Suggested Citation

  • John W. Byrd & Mailyn F. Johnson & Susan L. Porter, 1998. "Discretion in Financial Reporting: The Voluntary Disclosure of Compensation Peer Groups in Proxy Statement Performance Graphs," Contemporary Accounting Research, John Wiley & Sons, vol. 15(1), pages 25-52, March.
    • Handle: RePEc:wly:coacre:v:15:y:1998:i:1:p:25-52
    DOI: 10.1111/j.1911-3846.1998.tb00548.x
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    References listed on IDEAS

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    Cited by:

    1. Johnson, Marilyn F. & Nelson, Karen K. & Shackell, Margaret B., 2001. "An Empirical Analysis of the SEC's 1992 Proxy Reforms on Executive Compensation," Research Papers 1679, Stanford University, Graduate School of Business.
    2. Melis, Andrea & Gaia, Silvia & Carta, Silvia, 2015. "Directors' remuneration: A comparison of Italian and UK non-financial listed firms' disclosure," The British Accounting Review, Elsevier, vol. 47(1), pages 66-84.
    3. Lin, Yu-En & Jiang, Xiao-Tong & Yu, Bo & Lam, Keith S.K., 2023. "Compensation peer crash risks and corporate own investments: New evidences from U.S. stock markets," International Review of Financial Analysis, Elsevier, vol. 89(C).
    4. Kevin Mayo & George Ball & Alex Mills, 2022. "CEO Tenure and Recall Risk Management in the Consumer Products Industry," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 743-763, February.
    5. James Bannister & Harry Newman & Joseph Weintrop, 2011. "Tests for relative performance evaluation based on assumptions derived from proxy statement disclosures," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 127-148, August.
    6. Bizjak, John M. & Lemmon, Michael L. & Naveen, Lalitha, 2008. "Does the use of peer groups contribute to higher pay and less efficient compensation?," Journal of Financial Economics, Elsevier, vol. 90(2), pages 152-168, November.
    7. Madonna O’Sullivan & Majella Percy & Jenny Stewart, 2008. "Australian evidence on corporate governance attributes and their association with forward-looking information in the annual report," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 12(1), pages 5-35, March.

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