Download this Paper Open PDF in Browser

Is Say on Pay All About Pay? The Impact of Firm Performance

40 Pages Posted: 3 Oct 2017 Last revised: 22 Nov 2017

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Darius Palia

Rutgers Business School; Center for Contract & Economic Organization

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Date Written: November 1, 2017

Abstract

The Dodd-Frank Act of 2010 mandated a number of regulatory reforms including a requirement that large U.S. public companies provide their shareholders with the opportunity to cast a non-binding vote on executive compensation. The “say on pay” vote was designed to rein in excessive levels of executive compensation and to encourage boards to adopt compensation structures that tie executive pay more closely to performance. Although the literature is mixed, many studies question whether the statute has had the desired effect. Shareholders at most companies overwhelmingly approve the compensation packages, and pay levels continue to be high.

Although a lack of shareholder support for executive compensation is relatively rare, say on pay votes at a number of companies have reflected low levels of shareholder support. A critical question is what factors drive a low say on pay vote. In other words, is say on pay only about pay?

In this article, we examine that question by looking at the effect of three factors on voting outcomes -- pay level, sensitivity of pay to performance, and economic performance. Our key finding is the importance of economic performance to say on pay outcomes. Although pay-related variables affect the shareholder vote, even after we control for those variables, an issuer’s economic performance has a substantial effect and, perhaps most significantly, shareholders do not appear to care about executive compensation unless an issuer is performing badly. In other words, the say on pay vote is, to a large extent, say on performance.

This finding has important implications. First, it raises questions about the federally-mandated shareholder voting right as a tool for concerns about executive compensation. Say on pay has limited effectiveness if it is only being used to discipline managers who are underperforming or alternatively is not a vote on outsize or inordinate pay as it was intended to be. Second, and more important, to the extent that the shareholder vote influences board behavior, granting shareholders another forum for signaling their dissatisfaction with a firm’s economic performance may be counterproductive. If investors are signaling concerns over near-term stock performance through their say on pay votes, they may be increasing director incentives to focus on short-term stock performance rather than firm value.

Keywords: corporate governance, Wall Street reform, Dodd-Frank Act, say on pay, performance based executive compensation, disclosure, shareholder voting, empirical analysis, problematic incentives, short-termism, excessive risk-taking

JEL Classification: G38, K22, M12

Suggested Citation

Fisch, Jill E. and Palia, Darius and Davidoff Solomon, Steven, Is Say on Pay All About Pay? The Impact of Firm Performance (November 1, 2017). Harvard Business Law Review, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 17-39; European Corporate Governance Institute (ECGI) - Law Working Paper No. 374/2017. Available at SSRN: https://ssrn.com/abstract=3046597

Jill Fisch (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

Darius Palia

Rutgers Business School ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Center for Contract & Economic Organization ( email )

435 W 116th St.
New York, NY 10027
United States

Steven Davidoff Solomon

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

Paper statistics

Downloads
194
Rank
134,863
Abstract Views
825