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

See all articles by Mary Elizabeth Thompson

Mary Elizabeth Thompson

Miami University of Ohio - Department of Finance

Kelly R. Brunarski

Miami University of Ohio - Department of Finance

T. Colin Campbell

University of Cincinnati - Department of Finance - Real Estate

Yvette S. Harman

Miami University

Date Written: August 31, 2017

Abstract

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

Thompson, Mary Elizabeth and Brunarski, Kelly R. and Campbell, Timothy Colin and Harman, Yvette S., Do Directors Suffer External Consequences for Failing to Align Executive Pay Practices with Shareholder Preferences? Evidence from Say-on-Pay Votes (August 31, 2017). Available at SSRN: https://ssrn.com/abstract=3069124 or http://dx.doi.org/10.2139/ssrn.3069124

Mary Elizabeth Thompson

Miami University of Ohio - Department of Finance ( email )

Oxford, OH 45056
United States

Kelly R. Brunarski

Miami University of Ohio - Department of Finance ( email )

Farmer School of Business
Oxford, OH 45056
United States
513-677-2750 (Phone)

Timothy Colin Campbell (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Yvette S. Harman

Miami University ( email )

Department of Finance
Oxford, OH 45056
United States
513-529-5986 (Phone)

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