Shareholders Have a Say in Executive Compensation: Evidence from Say-on-Pay in the United States

This paper examines the SEC regulation requiring non-binding general shareholder vote on executive compensation–“say-on-pay” (SOP). We examine the first two years of SOP in the Russell 3000. The results confirm previous shareholder-proposal studies by finding that SOP approval (reject) votes are associated with: higher (lower) ROA, higher (lower) returns, lower (higher) institutional ownership and lower (higher) CEO compensation. We also find that approval (reject) SOP votes firms have: lower (higher) volatility, lower (higher) excessive compensation and lower (higher) abnormal accruals. We find some evidence to suggest that the effect of institutional ownership is less in 2012 than in 2011. This study contributes to the literature in three ways. First, we find evidence that SOP votes are sensitive to firm risk, excessive CEO compensation, accounting quality and financial performance. Second, we find that Boards react to SOP rejection votes by subsequently reducing the level of excessive compensation. Third, our results present evidence to suggest that shareholder voting rights -even when non-binding- could be an effective mechanism of corporate governance that addresses the problem of incomplete contracts and management rent extraction.