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For an earlier presentation of the authors' views when the referenced paper was first offered, see


The Harvard Law School Forum on Corporate Governance and Financial Regulation, October 19, 2009 posting



Shareholders’ Say on Pay: Does it Create Value?

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday October 19, 2009 at 9:06 am

(Editor’s Note: This post comes to us from Jie Cai and Ralph Walkling of Drexel University.)

In our forthcoming Journal of Financial and Quantitative Analysis paper, Shareholders’ Say on Pay: Does it Create Value?, we investigate whether allowing shareholder votes on executive compensation increases shareholder wealth. We perform three experiments to examine this issue. In our primary experiment, we examine the market reaction to the passage of the House of Representatives “Say on Pay Bill”, which was passed on April 20, 2007 by a 2-1 margin. In our second experiment, we examine the shareholder sponsored say-on-pay proposals targeting individual companies. In our third experiment, we ask whether shareholder votes are related to excess CEO compensation when they are asked to approve equity-based compensation plans.

Our primary experiment examines the stock price reaction of 1,270 of the largest corporations in the United States on the day the bill passed the House. The passage of the Say-on-Pay Bill might not be surprising to the market since Democrats were in control of the House. However, its 2-1 margin (269 positive votes vs. 134 votes against) was a surprise, as well as the fact that 55 Republican Congressmen also supported the Bill. We find a more favorable market reaction to the bill for firms that overpay their CEOs and for firms that have low pay-for-performance. Additionally, we find that the positive stock price reaction is more pronounced for firms with relatively weak, but not the weakest governance. These firms are likely to benefit from better compensation design if they implement such improvements under shareholder pressure. Conversely, firms with the weakest governance may not respond to advisory shareholder votes at all. Finally, market reaction is more favorable for firms that have higher activist shareholder ownership as well as firms that have previously responded to shareholder dissatisfaction as expressed in director elections.

In our second experiment, we use a sample of 113 say-on-pay shareholder proposals between 2006 and 2008 to examine shareholder-sponsored say-on-pay proposals targeting individual companies. We find that the companies targeted are not ones likely to benefit from say-on-pay. On average, the CEOs of these firms are not overpaid. Moreover, targeted firms have similar performance and governance as typical firms. Activist shareholders appear to target large firms. In addition, most of these proposals are sponsored by labor unions with very small stock holdings in the companies targeted. The stock prices of targeted firms react negatively to the announcement of union-initiated proposals and these proposals receive lower support from other shareholders. Finally, when shareholders vote down these proposals, the stock prices of targeted firms react positively, and the reaction is higher when more shareholders vote against the proposals.

In our third experiment, we examine shareholder votes concerning management proposals for approval of incentive compensation (mostly equity-based compensation plans). Using a sample of 2,511 management-sponsored compensation proposals voted on at 1,853 shareholder meetings during the 2003-2008 period, we find that shareholder support for such proposals is lower when abnormal CEO compensation is high and CEO pay-for-performance sensitivity is low.

Taken together, our evidence suggests that say-on-pay may benefit firms with questionable compensation practices but can hurt firms targeted by special interests. Thus, with say-on-pay it is not the case that one size fits all. The full paper is available for download here.



© 2009 The President and Fellows of Harvard College




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