Impact of the 1992 Changes in the SEC Proxy Rules and Executive Compensation Reporting Requirements

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Abstract
In 1992, the SEC abandoned its historical stance that executive pay issues relate to the ordinary business of a corporation when it revised its proxy rules and executive compensation reporting requirements. This change in policy allows executive pay issues to be subject to shareholder votes, while the new rules require greater pay disclosure and justification. The SEC argued this was needed to allow more effective monitoring of management by shareholders, which, they asserted, would help to reduce agency costs associated with the separation of firm ownership from control. However, the empirical results indicate shareholders experienced significant wealth losses to announcements concerning the new executive compensation reporting requirements. This suggests that the new rules have subjected boards to pressure about compensation issues from interests whose primary motivation may not be to increase the pay-for-performance sensitivity of executive pay, such as the media, labor unions and political activists.