Say on Pay, Executive Pay, and Board Dependence
36 Pages Posted: 12 Aug 2011 Last revised: 15 Feb 2014
Date Written: October 2013
I study the impact of "say on pay" (SoP) on the compensation policy and the level of board dependence of a firm in which the CEO has some power over the composition of the board of directors (BoD). My main finding is that SoP can significantly reduce the efficiency of the firm's compensation policy and make the BoD more dependent from the CEO. The result is based on the combination of two effects: First, for a given degree of board dependence, SoP disciplines the BoD and improves the efficiency of its pay practice. Second, whenever there is room for raising the level of board dependence, a powerful CEO captures the resulting surplus by establishing a more dependent BoD. In return, the new BoD offers the CEO a more generous bonus than in the absence of SoP. SoP can only improve the compensation policy of a poorly governed firm in cases where the level of board dependence cannot be adjusted. Overall, my analysis suggests that an isolated adoption of SoP can rather exacerbate than mitigate existing deficiencies in firms' governance structures and compensation policies.
Keywords: Say on Pay, Executive Compensation, Board Dependence, Corporate Governance
JEL Classification: G34, G38, K22, M12, M48
Suggested Citation: Suggested Citation