Equity-Based Incentives and Shareholder Say-On-Pay

Abstract

We study the relationship between CEO pay-performance sensitivity, pay-risk sensitivity, and shareholder voting outcomes as part of the "say-on-pay" provision of the 2010 U.S. Dodd-Frank Act. Consistent with our hypothesis, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay-performance sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders. We also document that future changes to equity-based incentives are related to voting outcomes and that shareholders incorporate CFO incentives into their votes. Collectively, these results provide evidence of the importance of equity-based incentives from the perspective of those most concerned with firm value and of the effectiveness of say-on-pay as a governance mechanism. Accepted by Journal of Business Finance and Accounting in January 2019.

Keywords: pay-performance sensitivity, pay-risk sensitivity, executive compensation, shareholder voting

JEL Classification: G34, G38, M48, M52