Does Transparency Increase Executive Compensation ? ∗

I study the impact of changes in compensation disclosure on the level and structure of executive compensation. I exploit exogenous variation of compensation information among executives after a corporate governance reform in Germany in the late 2000s. The reform, for the first time in Germany, required firms to publicly disclose the individual compensation packages of key executives. Prior to the reform, only outside board members deciding on the compensation packages were privileged to this information. Thus, prior to the reform, each firm had a subset of key executives those with outside board mandates that had more information about other managers’ salaries. Hence, I examine changes in the compensation of managers without a supervisory board mandate (treatment group) relative to the executives who already had the information due to their mandates (control group). I find that, relative to the control group, the treatment group’s wage increases when connected firms disclose. These findings show that enhanced disclosure can lead to a, likely unintended, effect of higher compensation levels and might explain recent excessive compensation.