‘Say on Pay’ Design and its Repercussion on CEO Investment Incentives, Compensation, and Firm Profit
Robert F. Göx
University of Zurich - Department of Business Administration (IBW); University of Zurich; University of Zurich - Faculty of Economics, Business Administration and Information Technology
University of Lausanne - Faculty of Business and Economics
Alexis H. Kunz
University of Bern - Institute of Accounting and Control
April 13, 2010
We conduct an experiment to study different shareholder voting right regimes in a setting where shareholders provide incentives to a CEO for a risky project choice through a discretionary bonus scheme. We compare three different types of shareholder voting rights (advisory, unconditionally binding, and conditionally binding voting rights) to the baseline case where shareholders have no say on CEO pay. We make the following observations: (1) Advisory and conditionally binding voting rights do not distort CEO investment incentives. Unconditionally binding voting rights adversely affect the CEO’s investment incentives. (2) Unconditionally binding voting rights are an effective instrument to curb executive compensation. Advisory shareholder voting rights have the opposite effect and can even increase executive compensation. (3) Most shareholders reject CEO bonus proposals whenever they have the right to do so. This effect is independent of the type of voting right in place and becomes more pronounced in case of poor project performance. (4) Advisory and conditionally binding voting rights have only limited impact on firm profit and executive compensation. In contrast, unconditionally binding voting rights reduce both, firm profit and executive compensation significantly. Overall, our results suggest that regulators should carefully evaluate dysfunctional economic consequences of shareholder voting rights before they are introduced or before existing rules are tightened.
Number of Pages in PDF File: 31
Keywords: Corporate Governance, Executive Compensation, Experimental Economics, Investment Incentives, Say on Pay
JEL Classification: G34, G38, M48working papers series
Date posted: April 13, 2010 ; Last revised: August 1, 2011
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