Say on Pay, Executive Pay, and Board Dependence

36 Pages Posted: 12 Aug 2011 Last revised: 15 Feb 2014

Robert F. Göx

University of Zurich - Department of Business Administration (IBW); University of Zurich; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Date Written: October 2013

Abstract

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

Göx, Robert F., Say on Pay, Executive Pay, and Board Dependence (October 2013). AAA 2012 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1908592 or http://dx.doi.org/10.2139/ssrn.1908592

Robert F. Goex (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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

Plattenstrasse 14
Zürich, 8032
Switzerland

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