Say On Pay Research Articles

Passive Institutions and Long-Run CEO Compensation: Evidence from Proxy Voting

A one-standard-deviation increase in passive ownership leads to a 25% increase in the compensation duration. I find proxy voting is the channel through which passive investors affect incentive horizons. Since the passage of the Dodd-Frank Act, passive funds tend to vote more against Say-on-Pay (SOP) proposals, and SOP proposals are less likely to pass with higher passive ownership. Moreover, passive ownership is associated with a greater number of shareholder-sponsored compensation proposals and an increased likelihood of these proposals passing. The overall findings indicate that passive institutions work to lengthen CEO compensation to align incentive horizons, and proxy voting is the mechanism through which they exert influence.

Shareholder activism in listed family firms: Exploring the effectiveness of say‐on‐pay on CEO compensation

AbstractThe widespread critical evidence surrounding executive compensation of listed corporations has boosted shareholder activism in recent decades. The say‐on‐pay (SOP) mechanism—a vote in which shareholders express their (dis)agreement with executive pay designs—is one of the corporate governance mechanisms that has led to this activism among listed firms. Merging agency and socioemotional wealth (SEW) arguments, this paper analyzes how effective SOP voting results are among listed family firms in terms of CEO compensation efficiency and equity. Using a sample of UK listed firms from 2011 to 2018, our results show that SOP effectiveness is positively influenced by family ownership and is strongly moderated by family involvement in management and in governance as well as by family generation. Our findings stress the strong family effect and the ethical perceptions of family shareholders on SOP voting, showing how family participation in the firm encourages fairer and more aligned CEO compensation packages. SOP institutional and practical implications oriented to preserve shareholder value and family wealth are finally outlined.

Tournament-based incentives and media sentiment

We find that promotion-based tournament incentives of executives are positively associated with firms’ media sentiment. This effect is more pronounced among firms with greater need for media favourability, captured by higher information opacity, lower analyst coverage, lower industry homogeneity, lower investment sentiment and lower managerial ability. Furthermore, we identify better financial performance and higher corporate branding as two channels through which tournament incentives can enhance a firm’s positive media sentiment. Our results are also robust to two quasi-natural experiments affecting promotion-based tournaments – (a) an exogenous CEO turnover due to health issues or sudden CEO death, and (b) the implementation of Say-on-Pay (SOP) law. Overall, our findings indicate that tournament-based incentives encourage a firm’s executives to showcase their skills to broader stakeholders, which consequently increases a firm’s media image.

Director reputational penalties when shareholders disapprove of executive compensation

AbstractWe investigate the reputational consequences for directors of firms that receive a low‐support Say‐on‐Pay (SOP) vote. These affected directors face a significantly greater likelihood of losing board seats, both at the voting firm and in the external labor market. However, penalties are not equal for all directors. Directors who serve on compensation committees and at firms with high chief executive officer pay suffer internal penalties. Both internal and external penalties affect directors of low‐support firms with high executive entrenchment. Compensation committee members serving low‐support firms are more likely to receive a negative reelection recommendation from Institutional Shareholder Services and fewer votes for reelection, at both voting and external firms. We provide the first evidence of external labor market penalties when directors fail to align executive compensation contracting with shareholder preferences. Our findings suggest that nonbinding SOP votes provide shareholders with a mechanism to influence director incentives and, therefore, executive compensation.

The moderating effects of CEO power and personal traits on say‐on‐pay effectiveness: Insights from the Anglo‐Saxon economies

AbstractThis study investigates the efficacy of say‐on‐pay (SOP) regulation in mitigating excessive CEO compensation and how it is affected by CEO personal traits and the power distribution inside a corporation. Using IV‐GMM method and a sample of 1,931 firms from Australia, Canada, the UK, and the USA, we find that shareholder voices are successful in reducing the pay gap between CEOs and the median employee, regardless of the exact nature of the regulation. In addition, older CEOs are associated with lower pay ratios and there are some evidences suggesting that older or female CEOs enhance SOP effectiveness. Further, power distribution manifested through corporate governance mechanisms matters, as increasing board size and director and audit committee independence reduce pay ratio. A measure of CEO power, CEO pay slice, has a significant and large positive explanatory power for the model and its exclusion can greatly exaggerate the estimated impact of SOP on pay ratio. Another measure of CEO power, CEO duality, appears to enhance the potency of SOP slightly. There is also some evidence indicating that ownership concentration enhances SOP effectiveness. Our findings have implications for companies, investors, and regulators concerning the importance of power balance structure within corporations.

Say on mobility:Do CEO outside opportunities affect shareholder say on pay?

We investigate whether shareholders take into account CEO outside opportunities when casting their say on pay (SoP) votes. By employing the staggered rejection of the inevitable disclosure doctrine (IDD) by US states as an exogenous shock that increases key talent outflow risk, we find that IDD rejection moderates the well-documented positive relation between CEO pay and dissenting SoP votes. The effect is concentrated in firms with more able managers, higher firm efficiency, better operating performance, and greater uncertainty of a new manager's ability. Our results are the first to highlight talent retention as an important motive for affirmative SoP votes.

Corporate governance, CEO turnover and say on pay votes

Purpose The purpose of this study is to investigate how compensation committee structure or characteristic impacts say on pay (SOP) voting dissent and the impact of SOP dissent on chief executive officer (CEO) turnover. Design/methodology/approach The authors use corporate governance and SOP data to test the relationships amongst variables. Additional analysis is performed using one-to-one propensity-score matched samples. Findings The authors find that firm-years with at least a female member present on the compensation committee are associated with lower SOP dissent. The authors find mixed results of the impact of SOP dissent on CEO turnover. Practical implications This paper suggests that diversity on the compensation committee, particularly the presence of at least a female member on the committee, serves as an important determinant of SOP voting outcome in the USA. The paper provides policymakers and practitioners with insights into factors influencing SOP voting outcomes and implications of SOP dissent for firms. Originality/value The findings of this paper contribute to the corporate governance literature by enhancing the understanding of the role of the compensation committee as it relates to SOP dissent and effect of SOP dissent on CEO turnover.

Say-on-Pay voting dispersion in listed family and non-family firms: A panel data analysis

The study of Say-on-Pay (SOP) – a shareholder vote on executive compensation – is a key topic in the corporate governance field, despite which its influence in the context of family firms has not been studied until now. In response to this need, this paper pursues a twofold objective: first, to analyze differences in shareholder voting behavior between family and non-family firms; second, to explore the impact of increasing family ownership on voting dispersion among family firms, testing the related moderating effects of family involvement in management and governance on this relationship. Focusing on a sample of large UK listed companies from 2007–2017, our results show that the distinctive features of family firms lead to more concentrated voting positions regarding pay packages compared to non-family firms, with this voting concentration tending to be higher as family ownership increases. Moreover, while this relationship intensifies when the family is involved in management, we find partial support in the case of family involvement in governance.

Mind the gap: CEO–employee pay ratios and shareholder say‐on‐pay votes

AbstractWe examine the Securities and Exchange Commission's assertion in the pay ratio disclosure rule that the ratio of Chief Executive Officer to employee pay is useful to shareholders for say‐on‐pay (SOP) voting decisions. Using an estimated pay ratio for a broad panel of commercial banks from 2010 to 2017, we find that voting dissent on SOP proposals is significantly higher in the top pay ratio decile, particularly when institutional ownership is high. Results are robust to controlling for a number of other determinants of voting dissent, including proxy advisor recommendations and executive compensation. Additionally, inferences using the first year of disclosed pay ratios in 2017 for S&P 1500 firms are consistent. However, we do not find similar results in the other deciles of the pay ratio in either sample, calling into question whether a cost‐benefit analysis would support the disclosure requirement imposed by Dodd‐Frank and implemented by the SEC.

The impact of Say-on-Pay votes on firms' strategic policies: Insights from the Anglo-Saxon economy

This study examines evidences of executive reactions to say-on-pay (SOP) votes in terms of strategic policies which could affect firms' long-run growth and eventual survival. We employed an unbalanced panel data from 1932 firms taken from four countries in the Anglo-Saxon economy, covering time periods when different forms of SOP were implemented in these countries. Using Limited Information Maximum Likelihood (LIML) estimator to gauge the simultaneous determination of SOP votes and firm strategic policies, we find that, in line with shareholders preferences, US firms had increased capital expenditure ratio; Australian and US firms had reduced reliance on debt financing; US managers had shifted focus on current rather than long-term profit, but evidences emerged from other countries are unclear. Corroborations also suggest that excess liquidity was shunned by Canadian shareholders, but the reactions of their company executives were overly disproportionate. UK firm policies did not appear to have been affected by SOP, and vice versa. Overall, the varying effects of SOP votes on firms' strategic policies might be ascribed to either the adoption of a specific SOP practice or the effectiveness of the board.

Compensation-related institutional investor activism – a literature review and integrated analysis of sustainability aspects

PurposeThis paper aims to analyse whether and how different types of institutional investors influence shareholder proposal initiations, say-on-pay (SOP) votes and management compensation from a sustainability perspective.Design/methodology/approachBased on the principal-agent theory, the authors conduct a structured literature review and evaluate 40 empirical-quantitative studies on that topic.FindingsThe traditional assumption of homogeneity within institutional investors, which is in line with the principal–agent theory, has to be questioned. Only special types of investors (e.g. with long-term and non-financial orientations and active institutions) run an intensive monitoring strategy, and thus initiate shareholder proposals, discipline managers by higher SOP dissents and prevent excessive management compensation.Research limitations/implicationsA detailed analysis of institutional investor types is needed in future empirical analyses. In view of the current debate on climate change policy, future research could analyse in more detail the impact of institutional investor types on proxy voting, SOP and (sustainable) management compensation.Practical implicationsWith regard to the increased shareholder activism and regulations on SOP and management compensation since the 2007/2008 financial crisis, firms should be aware of the monitoring role of institutional investors and should analyse their specific ownership nature (time- and content-driven and as well as range of activity).Originality/valueTo the best of authors’ knowledge, this is the first literature review with a clear focus on institutional investor range and nature, shareholder proposal initiation, SOP and management compensation (reporting) from a sustainability viewpoint. The authors explain the main variables that have been included in research, stress the limitations of this work and offer useful recommendations for future research studies.

Managerial discretion, say on pay, and CEO compensation

PurposeThe purpose of this paper is to analyze the influence of managerial discretion on the effectiveness of say on pay (SOP) as a governance mechanism. This goal covers an important gap since the issue of how effective SOP is in promoting more aligned compensation has proved somewhat controversial.Design/methodology/approachThis empirical research opted for a panel methodology for the period 2003–2017, using a sample of large UK listed-companies (specifically, 3,445 firm-year observations). Data were obtained from several sources (Manifest Ltd, BoardEx, Worldscope, Factset Ownership and DataStream).FindingsResults show that managerial discretion plays an important role in the effectiveness of SOP as a mechanism for increasing aligned CEO compensation. While individual discretion (latitude of objectives) exerts a negative effect, contextual discretion (latitude of action) increases SOP effectiveness. The global effect of managerial discretion is positive when there is high level of both individual and contextual discretion.Originality/valueThis empirical study provides evidence concerning an emerging topic in the literature regarding the impact of SOP as a shareholder activism mechanism of corporate governance on executive compensation. By taking managerial discretion into consideration as a relevant moderating factor, it also offers a better explanation of SOP effectiveness as a governance mechanism.

An investigation of corporate directors' responses to CEO pay ratio disclosures and say‐on‐pay votes

AbstractThe purpose of this study is to shed light on the effects of the CEO pay ratio and say‐on‐pay votes on directors' concerns about CEO pay equity. Investigation of the pay ratio disclosure rule offers opportunities to gain insights into whether equity perceptions associated with mandated pay ratio disclosure have significant effects on remuneration decisions in organizations. We conduct an online experiment with practicing corporate directors to examine the effects of CEO pay ratio disclosures and say‐on‐pay (SOP) votes on director decisions. Results indicate that CEO pay ratio disclosures significantly influence directors' decisions regarding executive compensation, leading directors to be less willing to increase CEO pay when the pay ratio is above the industry average pay ratio. Results also demonstrate that say‐on‐pay votes only influence directors' compensation decisions when the CEO pay ratio is above the industry average. Directors in firms with pay ratios that are above the industry average are less willing to increase CEO pay when they anticipate shareholder votes against a CEO pay increase than when they anticipate positive SOP voting outcomes. Directors in firms with CEO pay ratios that are below the industry average, however, are willing to increase CEO pay regardless of SOP voting outcomes.

Compensation consultants: Does reputation matter?

In this paper, we analyze the role of hiring a reputable compensation consultant for firms wanting to secure affirmative Say on Pay (SoP) votes. We provide evidence that reputation influences shareholders voting behavior positively when CEO pay is excessive and when peer CEOs are paid less. We employ two methods to account for endogeneity, instrumental variables as well as examining firms switching up to more reputable compensation consultants. Our results are robust with respect to CEO pay and complexity as well as fees and alternate measures of reputation. Firms concerned with the negative feedback associated with negative SoP votes should factor reputation in their decision to hire consultants, especially if trying to adopt compensation packages that may appear excessive.

It's OK to pay well, if you write well: The effects of remuneration disclosure readability

AbstractWe examine whether, and how, shareholders’ votes in the Say‐on‐Pay (SOP) are affected by the readability of the Compensation Discussion and Analysis (CD&A). Despite the SEC's Plain English requirement, qualitative disclosures on executive remuneration are generally long and complex. Extant evidence on whether low readability results in higher or lower shareholder dissent in the SOP, however, is ambiguous. We resolve this debate by demonstrating that the effects of readability on SOP voting are heterogeneous; while obfuscation may reduce dissent when CEO compensation is close to “normal” levels, diminished readability results in increased scepticism when pay levels are clearly excessive. The moderating role of readability is most pronounced for firms with less sophisticated shareholders, consistent with readability acting as a heuristic cue. Our results are robust to propensity score matching, and are less pronounced (1) when shareholders have less time to review the CD&A, and (2) when shareholders are distracted by competing AGMs, suggesting they are driven by readability, directly. Overall, our results highlight that greater use of Plain English in remuneration disclosures can have a substantial persuasive impact on shareholders.

Are shareholders gender neutral? Evidence from say on pay

This study investigates whether gender pay inequality in the top management team, measured by gender pay slice (GPS), is a factor in Say on Pay (SoP) voting as required by the 2010 Dodd-Frank Act. Since CEOs are known to play a distinct role in SoP voting, we treat CEOs separately and define GPS as the fraction of total non-CEO executive compensation captured by females. Controlling for numerous factors including CEO pay and CEO gender, ISS recommendations, pay composition, firm performance, and other firm characteristics, we find robust evidence of a negative relation between non-CEO GPS and SoP votes, but this gender-based difference in SoP voting does not extend to the CEO. Taken together, our findings imply that gender equality in terms of SoP voting is still an issue for female executives at the sub-top level.

Let’s talk about money! Assessing the link between firm performance and voluntary Say-on-Pay votes

With the UK Directors’ Remuneration Act and the US Dodd-Frank Act, a decent amount of research has examined so-called Say-on-Pay votes in countries where they are legally mandatory. In contrast, little is known about countries such as Germany or Canada, both of which operate in a voluntary Say-on-Pay (SOP) system. In a voluntary SOP system, the firms’ managers can decide whether to sponsor a vote or not, and it is unclear how this decision and the subsequent voting dissent is influenced by firm performance. To reduce this research gap, this paper analysed a hand-collected sample from Germany covering 1746 annual general meetings that took place between 2010 and 2016. The results indicate that voting likelihood is positively associated with the relative market valuation of the firm (Tobin’s Q) as long as the firm meets or beats analyst earnings forecasts and is negatively associated with free cash flow when the firm fails to meet forecasts. Only large companies with dispersed ownership grant a vote when they do not meet or beat the forecasts. Once the vote has been cast, voting dissent is lower for firms that meet/beat their forecasts and have high free cash flows or high market valuations. However, shareholders do not reward high CSR-performance with less voting dissent. Overall, the results emphasise the importance of financial performance for SOP voting likelihood and voting dissent.

Say on pay and executive compensation: A systematic review and suggestions for developing the field

Say on pay (SOP) is a form of shareholder activism where shareholders express their opinions on executive compensation by casting a vote in the annual general meeting. To date, although a large variety of results, antecedents and outcomes have been mentioned and discussed, knowledge about SOP is still limited. This study, through a systematic literature review of 44 articles on SOP published between 2010 and 2018 in finance and management journals, aims to explore our understanding of SOP effectiveness by analyzing its conceptualization, theoretical foundations, methodological issues, antecedents and derived outcomes. After identifying some common patterns in SOP effectiveness that reflect a specific governance contextualization, we provide a guide to develop future research in the field, highlighting key implications for human resource management academics and practitioners.

Say-on-Pay Voting and CEO Compensation Structure

I examine how the structure of CEO compensation affects Say-on-Pay (SOP) voting and how SOP outcomes influence subsequent changes to compensation structure. I find that voting dissent decreases as the percent of performance sensitive compensation including equity and non-equity incentive increases. Additionally, investors vote more favorably when equity comes in the form of performance-vested equity or stock options as opposed to time-vested restricted stock. Subsequent to higher levels of voting dissent, however, I do not find that firms make changes to align compensation structure with investor preferences for more performance sensitive compensation as expressed through prior voting. Instead, I find that firms with greater SOP voting dissent in the prior year tend to increase performance-vested equity and decrease stock options in CEO compensation. A 20% increase in votes “Against” in the prior year SOP vote is associated with a 3.9% increase in performance-vested equity as a percent of total compensation and a 2.3% decrease in stock options. These results demonstrate that, while SOP voting is influencing compensation structure, it is not clear that these changes are resulting in more performance sensitive compensation.

Corporate Governance Mechanisms and CEO-to-Worker Pay Gap: An Empirical Insight from the UK

Through the lens of agency and social norms theories, this study investigates the extent to which say-on-pay (SOP) votes and other corporate governance mechanisms are able to predict CEO-to-worker pay gap. Based on a large sample of companies listed on the FTSE 350 index covering a significant post-financial crisis period (2010-2015), the results, after controlling for endogeneity problems, show no relationship between SOP votes and CEO-to-worker pay gap. We document that CEO turnover and CEO tenure are the major reasons the gap existed over time. Our study did not find any link between either board gender diversity or the proportion of board independent directors and the CEO- to-worker pay gap. Also, we provide further evidence that CEO-to-worker pay ratio increases with firm size.