Do Directors Suffer External Consequences for Poor Oversight of Executive Compensation? Evidence from Say-on-Pay Votes

Abstract

We provide the first evidence of significant external labor market penalties when directors fail to properly oversee executive compensation. When shareholders express disapproval through low Say-On-Pay (SOP) support, equity values decrease at firms linked by a shared director (interlocking firms), directors lose external board seats and compensation committee positions, and external directorial compensation decreases. Additionally, shareholder scrutiny increases at interlocking firms: shareholders are more likely to select annual SOP voting and offer low subsequent SOP support. We also provide the first evidence that SOP votes provide shareholders with a valuable mechanism to influence director incentives, and therefore, executive compensation contracts.

Keywords: Director Reputation, Director Labor Market, Director Turnover, Say-on-Pay, Corporate Governance, Executive Compensation

JEL Classification: G34, G38, J33, M52