Say-on-Pay and Shareholder Value: The Tension between Agency and Hold-up

Abstract

A set of policy experiments regarding binding say-on-pay votes in Switzerland suggests
that shareholders may prefer to have limits set on their own power. The stock price reactions
indicate a trade-off: On the one hand, binding votes on executive compensation
amounts enhance the alignment of management interests with those of the shareholders,
reducing agency costs. On the other hand, when shareholders have the power to
(partially) set pay levels retrospectively, it may increase hold-up problems by distorting
executives’ incentives to make extra-contractual, firm-specific investments. These findings
have implications for the design of policy.

Keywords: say-on-pay, event study, corporate governance, executive compensation

JEL Classification: G38, G34