The evidence from the experience with say on pay has recently been reviewed in the study, “Say on Pay Votes and CEO Compensation: Evidence from the UK”, by Fabrizio Ferri and David Maber (see HERE).
Three sets of analyses were undertaken. Firstly, the authors find higher “no” votes for companies with weak “pay penalties” for poor performance, e.g. companies with excess CEO pay combined with poor performance and companies with generous severance contracts, which can weaken penalties in the event of poor future performance.
Second, they found that companies reacted to high “no” votes by changing executive pay. They compared changes to compensation contracts made by high dissent companies (i.e., companies that experienced more than 20% voting dissent) before and after the first say on pay vote, with changes made by a matched sample of low dissent companies (i.e., companies that experienced less than 5% voting dissent but with otherwise similar characteristics).
Analyses indicate that, after the vote, high dissent companies were more likely to remove provisions viewed as “rewards for failure” (e.g., generous severance contracts, provisions allowing the retesting of performance conditions), often in response to institutional investors’ explicit requests, and reaped the benefits in terms of lower or no dissent at the following year’s annual meeting. Low dissent companies were more likely to remove such provisions before the vote, presumably in a (successful) effort to avoid voting dissent.
These different patterns of behavior around the vote for high and low dissent companies suggest that the observed changes were the direct result of say on pay.
The third set of analyses found a significant improvement in CEO pay sensitivity to performance. The authors employed regression analysis to evaluate the sensitivity of CEO pay to realized performance and other economic determinants before and after say on pay regulation. Using a large sample of UK companies, they found a significant increase in the sensitivity of CEO pay to poor performance (particularly in high dissent companies and companies characterized as having excess CEO pay before the adoption of say on pay), while the relationship between pay and other economic determinants remained unchanged.
It thus appears that say on pay has a moderating effect on the level of CEO compensation at poorly performing companies. Interestingly, the authors did not find a similar effect in a control sample of UK companies not subject to say on pay, UK companies traded on the Alternative Investment Market.
Taken together with their evidence of explicit changes to compensation practices, these additional tests support a causal interpretation of the researchers’ findings.
Overall, the study suggests that UK investors perceived say on pay to be a value enhancing monitoring mechanism, and were successful in using say on pay votes to pressure companies to remove controversial pay practices and increase the sensitivity of pay to poor performance. The full paper is available for download HERE.© Guerdon Associates 2023 Back to all articles