Shareholder scrutiny drives disclosure of executive pay packages

[img_inline align=”right” src=”http://padnws01.mcmaster.ca/images/kanagaretnam.jpg” caption=”Kiridaran Kanagaretnam”]A growing movement to force corporations to disclose exactly how much they pay their executives is a knee jerk reaction to high profile corporate scandals, a McMaster finance expert says.

Kiridaran Kanagaretnam, a professor of accounting and financial management at the DeGroote School of Business, explains that across many industries, stock options have become an increasingly popular compensation tool over the last decade, raising concerns among the investment community that senior executives are over-paid. Typically, executive pay packages contain four basic components: a base salary, an annual bonus, stock options, and long-term incentive plans.

Earlier this year, the U.S. Securities and Exchange Commission voted to overhaul rules on how corporations disclose the pay and perks awarded to their top executives and directors. At the same time, Canada's banks, bowing to pressure from investor advocates, agreed to begin disclosing how much of their profit is used to fund the pay cheques of senior executive teams.

In a research project titled “Executive Compensation, Firm Performance and the Quality of Earnings” funded by the Social Sciences and Humanities Research Council of Canada (SSHRC), Kanagaretnam surveyed compensation packages at various companies.

“This trend to disclose all of the financial details of an executive's compensation package signifies that in the aftermath of various high profile failures such as Enron, investors are not willing to just trust that companies have their best interests in mind,” says Kanagaretnam. “Shareholders are now much more demanding and diligent when it comes to keeping tabs on how a company is spending their money.”