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Directors & Boards, April 2, 2009 and Fourth Quarter 2008 article


Directors & Boards


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‘Say on Pay’: What the Market Thinks 

Our results provide objective evidence for the current debate — say on pay can create value in firms with egregious pay, but blanket application to all firms can destroy value.

By Ralph A. Walkling

In general, say on pay gives shareholders an advisory vote on CEO compensation. Heated arguments have been made on both sides of the issue, yet to date there is little actual evidence about the market’s reaction to say on pay. You can imagine three possible outcomes of say on pay legislation:

• First, it’s possible that the initiative could create value by better aligning the interest of owner and managers.

• Second, since the vote is advisory only, it could have little impact on firm value. Firms need not take any action regardless of the outcome. Academic research generally finds little market reaction to advisory vote initiatives.

• Third, the legislation could be disruptive. A strong case can be made that the authority for executive compensation must remain inside the boardroom and that attempts to alter this authority will destroy value. The chairman of Directors and Boards, Robert Rock, has written eloquently about say on pay, making this very point: “Should shareholders have the right to an advisory vote on executive compensation? With the exception of where pay is egregious, I don’t think so.” [“Say on Pay Is a Populist, but Misguided, Notion,” Directors & Boards, Third Quarter 2008.]

In a Drexel University working paper, “Shareholders’ Say on Pay: Does It Create Value?” [see link below] my co-author, Jie Cai, and I examine the market’s reaction to say on pay legislation and related shareholder-sponsored initiatives. Here are some of our results.

The First Legislative Volley

On April 20, 2007, the House passed the Shareholder Vote on Executive Compensation Act (H.R. 1257) by a two-to-one margin. The same day, then-Senator Barack Obama introduced a companion bill in the Senate. Neither bill limits CEO pay but requires a nonbinding shareholder vote on executive compensation. John McCain, while campaigning for President, also expressed general agreement with say on pay.

To examine the market’s reaction to the say on pay legislation we calculated risk-adjusted rates of return for over 1,200 firms ranked by level of “abnormal” CEO compensation.

Our results indicate that, after controlling for market movements and other confounding factors, firms with the highest level of unexplained CEO compensation and lowest pay for performance experienced significantly positive returns when the bill passed the House.

This result is consistent with the market believing that say on pay legislation improves value for these firms. It is also consistent with Robert Rock’s suggestion that say on pay would be useful only where pay is egregious. Presumably firms with the lowest level of unexplained compensation (underpaid executives, if you prefer) don’t need say on pay. Indeed, these firms experienced small (statistically insignificant) market-reaction losses.

The Highest Returns

We also found that the highest market returns were earned by firms responsive to shareholder proposals in the past and by firms with higher levels of activist shareholdings.

All of these results may understate the impact of say on pay legislation. We again note that the vote is advisory. But the results indicate gains to firms that could benefit if say on pay were to be implemented.

One argument against say on pay is that if it were beneficial, firms could adopt it voluntarily. Blockbuster, Apple, and Aflac are among the companies that have done just that, and activists have pressured many other companies on say on pay. We found about 50 companies in the 2005-2006 period that were individually targeted by shareholder proposals related to say on pay.

When Value Was Destroyed

However, our results indicate that the firms targeted by these proposals appear unlikely to benefit from say on pay. In general, their market performance was superior, their CEOs did not have higher levels of unexplained compensation, and their corporate governance was not abnormal. At the announcement of say on pay proposals for these firms, value was destroyed. On average, these firms experienced significantly negative abnormal returns when the proposals were announced. Interestingly, unions sponsored most of these say on pay proposals.

The subject of executive compensation is certain to remain a hot topic. Our results provide objective evidence for the current debate on say on pay. Say on pay can create value in firms with egregious pay, but blanket application to all firms can destroy value. As with much legislation, one size does not fit all.


Dr. Ralph A. Walkling is Stratakis Chair and executive director of the Center for Corporate Governance at Drexel University’s LeBow College of Business. He is a regular contributor to Directors & Boards.

He can be contacted at

This article originally appeared in the Fourth Quarter 2008 edition.


Copyright © 2008 Directors & Boards, P.O. Box 41966, Philadelphia, PA 19101-1966. All rights reserved.

For the final version of the paper, see




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