In December 2003, The Montreal Gazette reported: "CEO decries rules on executive compensation disclosure." The article cited a speech by the CEO of the Caisse de dpt et placement du Qubec. The Caisse is a major institutional investor that holds shares in numerous companies; thus, it is keenly interested in questions of executive motivation and compensation. The Caisse's concern was with the rules of the Autorit des marchs financiers (Quebec's securities commission) requiring firms to disclose details on the compensation of their five most highly paid employees. The Caisse's CEO maintained that the effect of these rules is simply to exert upward pressure on pay levels, as executives demand raises to meet or exceed that of their peers in other companies.

Against this backdrop, the Royal Bank of Canada compensation plan (described in Example 10.1 in the course textbook) states that an executive's total compensation is positioned relative to the median of what is paid by a group of similar companies.

Required

a.Delineate the argument in favor of companies disclosing compensation information of their senior executives. Why do you think that the Caisse's CEO rejected this argument?

b.What effect do you think the policy of Royal Bank of Canada of relating its total executive compensation to the median of that paid by comparable companies will have on the level of executive compensation in the banking industry over time?