The Impact of the Dodd-Frank Act on Executive Compensation

Abstract

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) on July 21, 2010, which became effective for shareholder meetings held on, or after January 21, 2011. The Dodd-Frank Act requires U.S. public companies to conduct an initial advisory, non-binding vote on executive compensation called say-on-pay and a subsequent vote on the frequency of say-on-pay. This study investigates the voting pattern of the say-on-pay and the say-on-frequency and examines the impact of the Dodd-Frank Act on the amount and structure of executive compensation. The say-on-pay and say-on-frequency patterns of over 1,700 companies from the ExecuComp database are investigated using the U.S. Securities and Exchange Commission Forms DEF 14A, 8-K, and 10-Q. A further study of S&P 500 companies, from 1992 – 2009, found in the Wharton Research Data Services is used in the regression analysis to forecast executive compensation. Results show that 98% of the sample firms are supported by a majority of shareholders who voted on executive compensation, while 2% of the sample firms failed the say-on-pay. Preliminary results show that 60% of companies initially recommended every three years as the preferred say-on-frequency, while the shareholders voted in favor of every one year (90% of the companies). However, company recommendations for say-on-frequency have grown from 60% in favor of every three years in March 2011 to 63% in favor of every one year in December 2011, suggesting that companies are responding to shareholder pressure. Further results indicate that executive total cash compensation (salary plus bonus) has been decreasing since 2006. Additional analyses, comparing 2010 to 2009 total cash compensation, show that firms reduced total cash compensation in 2010 prior to the advisory vote on executive compensation.