The Enforcement of Say on Pay Votes and CEOs’ Investment Incentives

67 Pages Posted: 13 Apr 2010 Last revised: 18 Aug 2014

See all articles by Robert F. Göx

Robert F. Göx

University of Zurich - Managerial Accounting; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Frédéric Imhof

University of Lausanne - Faculty of Business and Economics

Alexis H. Kunz

University of Bern - Institute for Accounting

Date Written: May 1, 2014

Abstract

We investigate experimentally how the enforcement of negative say on pay (SoP) votes affects a CEO’s investment incentives, the level and structure of executive compensation, and firm performance. We operationalize the board’s discretion in response to a no-vote via three levels of SoP enforcement. Boards in our experiment either (i) neglect the vote and never adjust CEO compensation (no enforcement), (ii) enforce the vote and always adjust CEO compensation in accord with the vote (unconditional enforcement), or (iii) enforce the vote and adjust CEO compensation only when the firm performs poorly (conditional enforcement). We find that the unconditional enforcement of no-votes is an effective instrument to curb rents of powerful CEOs. However, it also creates a hold-up problem that undermines CEOs’ investment incentives and firm profit. Conversely, the conditional enforcement of SoP votes eliminates the hold-up problem and improves the pay-for-performance relation, but has no effect on firm profit. We also find that the non-enforcement of SoP votes increases CEO compensation without affecting firm profit. These negative effects of an unconditional enforcement of SoP votes remain robust when participants interact repeatedly and/or when shareholders communicate “acceptable” bonus levels to CEOs. Our results inform regulators and boards of directors on the externalities and the potential cost that may arise when negative SoP votes are enforced mechanically.

Keywords: Corporate Governance, Executive Compensation, Experimental Economics, Investment Incentives, Say on Pay

JEL Classification: G34, G38, M48, M52.

Suggested Citation

Goex, Robert F. and Imhof, Frédéric and Kunz, Alexis H., The Enforcement of Say on Pay Votes and CEOs’ Investment Incentives (May 1, 2014). Available at SSRN: https://ssrn.com/abstract=1588682 or http://dx.doi.org/10.2139/ssrn.1588682

Robert F. Goex (Contact Author)

University of Zurich - Managerial Accounting ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Frédéric Imhof

University of Lausanne - Faculty of Business and Economics ( email )

Department of Accounting and Control
Internef 510
Lausanne CH-1015
Switzerland
+41(0)216923458 (Phone)

Alexis H. Kunz

University of Bern - Institute for Accounting ( email )

Engehaldenstrasse 4
Bern, CH-3012
Switzerland

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