Shareholder Remuneration Votes and CEO Compensation Design

Abstract

Using a sample of large UK firms from 2002 - 2006, we examine the role that shareholder remuneration votes play in executive compensation design. In particular, we investigate what aspects of CEO compensation shareholders vote against and whether corporate boards, in turn, respond to negative votes by making changes in those CEO pay elements. Prior research investigates US firms that voluntarily seek shareholder ratification of equity compensation plans and thus may suffer from self-selection bias. Conversely, the UK provides an ideal setting because remuneration votes have been required for all listed firms since 2002. Results indicate that shareholders disapprove of higher salaries, weak pay-for-performance sensitivity in bonus pay and greater potential dilution in stock-based compensation, particularly stock option pay. We find some evidence that boards respond to past remuneration votes by decreasing grants of stock option compensation but not by changing salary or the pay-for-performance link in bonus pay accordingly.

Keywords: executive compensation, shareholder vote

JEL Classification: J33, G34