Do Directors Suffer External Consequences for Failing to Align Executive Pay Practices with Shareholder Preferences? Evidence from Say-on-Pay Votes
68 Pages Posted: 10 Nov 2017
Date Written: August 31, 2017
We provide the first evidence of external labor market penalties when directors fail to align with shareholder preferences for monitoring executive compensation. When shareholders express disapproval through low Say-On-Pay (SOP) support, directors incur significant external penalties, including lost board seats and compensation committee positions, decreased shareholder support for reelection, and decreased directorial compensation. Shareholders at firms sharing an affected director react negatively to the low support and increase their scrutiny of their firms’ pay practices. Our findings suggest that non-binding SOP votes may provide shareholders with a mechanism to influence director incentives, and therefore, executive compensation.
Keywords: Director Reputation, Director Labor Market, Director Turnover, Say-on-Pay, Corporate Governance, Executive Compensation
JEL Classification: G34, G38, J33, M52
Suggested Citation: Suggested Citation