Is Say on Pay All
About Pay? The Impact of Firm Performance
Posted by Jill E. Fisch (University of
Pennsylvania), Darius Palia (Rutgers Business School), and Steven
Davidoff Solomon (University of California, Berkeley), on Monday,
October 30, 2017
|
Editor’s Note:
Jill E. Fisch is Perry
Golkin Professor of Law at the University of Pennsylvania Law
School; Darius
Palia is Professor
of Finance at Rutgers University; and Steven
Davidoff Solomon is Professor of Law at
UC Berkeley School of Law. This post is based on a
article authored by Professor Fisch, Professor Palia, and
Professor Davidoff Solomon, forthcoming in the Harvard
Business Law Review. |
In
Is Say on Pay All About Pay? The Impact of Firm Performance, we
seek to answer the question whether “say on pay” votes really focus on executive
compensation. As policymakers evaluate the decision whether to retain say on
pay, it is worth examining more carefully the information that shareholders
convey through their vote on executive compensation, a question we examine in
this article. We find that, although pay plays a role in voting results, the say
on pay vote is largely a means for shareholders to express dissatisfaction with
firm performance.
U.S. issuers have now been required to
provide shareholders with the opportunity to cast an advisory vote on
executive compensation—say on pay—for five years. The effect of say on
pay remains heavily debated. Shareholders rarely reject compensation
plans; they fail to receive majority support at fewer than 2% of
issuers. Rather, shareholders at the overwhelming majority of issuers
vote to approve executive compensation, and the average percentage of
votes in favor exceeds 90%. The link between say on pay and CEO
compensation is unclear—CEO pay continued to rise for the first
several years after Dodd-Frank, declined in 2015 and, most recently,
in 2016, rose to record levels.
Even in
cases in which compensation packages fail to receive substantial support, the
effect of a low say on pay vote is unclear. Academic studies have reached
inconsistent results but have generally failed to find conclusive evidence that
issuers reduce executive pay packages in response to lower approval rates.
Studies suggest, however, that issuers modified the structure of executive pay
packages in response to the say on pay mandate, in particular, concentrating a
greater component of pay in restricted stock and stock options. It is not clear,
however, that this higher concentration of equity-based pay makes it truly
performance-based or that the modifications are increasing shareholder value.
We
analyze say on pay votes of S&P 1500 companies between 2010 and 2015. As might
be predicted, we find that both excess compensation and pay-performance
sensitivity affect the level of shareholder support for executive compensation
packages. More surprisingly, however, we find that, even after controlling for
these variables, a critical additional driver of low shareholder support for
executive compensation packages is the issuer’s economic performance. Say on pay
votes reflect, to a large degree, dissatisfaction with firm performance, and not
solely pay.
We
further test the role of Institutional Shareholder Services (ISS) voting
recommendations. We identify two important results. First, as with voting
outcomes, ISS recommendations are driven by an issuer’s economic performance,
independent of pay-related variables. Second, we show that ISS’s evaluation of
the CEO’s pay-performance sensitivity uses an ex post measure of sensitivity
and, as such, appears to differ from shareholder preferences.
Our
findings have important implications. First they suggest that shareholder voting
may be a poor tool to address public concerns about the size and structure of
executive compensation. Because of the key role of economic performance in
explaining say on pay voting outcomes, the say on pay vote operates as a signal
of investor dissatisfaction with executive pay only in poorly-performing
companies. So long as the issuer is performing well, even if executive pay is
too high or insufficiently tied to performance, these concerns will not lead
investors to vote against the pay package. To the extent that say on pay is
about curbing problematic compensation, it seems to be a rough and inadequate
tool.
Second,
and perhaps more importantly, shareholder support for executive pay seems to be
highly correlated with an issuer’s short term stock performance. Shareholders
appear to focus substantially on performance and to be punishing executives,
through say on pay, for poor performance rather than excessive pay. To the
extent that the say on pay vote heightens executives’ incentives to focus on
short term stock price at the potential cost of working to enhance long term
firm value, it may be counterproductive.
The
complete article is available
here.
|
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