Say-on-Pay and the Differential Effects of Voluntary versus Mandatory Regimes on Investor Perceptions and Behavior

Abstract

ABSTRACTSay-on-pay is a corporate governance mechanism through which investors cast a non-binding vote on executive compensation. The Dodd-Frank Act mandates say-on-pay for U.S. firms. Congress is currently considering changes to the legislation that would give boards much more discretion over say-on pay. Using an interactive laboratory experiment, we examine the relative effects of say-on-pay when it is mandated by law compared to when firms invite say-on-pay voluntarily, which is analogous to both the former U.S. regime and that proposed by current legislation. We find that boards voluntarily giving investors a say-on-pay, versus only offering it due to a regulatory mandate, improves investors' perceptions of the fairness of compensation-setting procedures, which leads to greater investor trust in boards of directors and increases their willingness to invest. We also find that investors react negatively when directors' compensation decisions do not conform to investors' expressed say-on-pay preference.JEL Classifications: M12; M48; M52.