Shareholder Voice and Executive Compensation

Abstract

Can non-binding shareholder votes impact corporate policies? Answering this requires understanding how much the threat of a failed vote impacts corporate decision-makers. I estimate a model of CEO compensation with non-binding shareholder approval votes ("Say-on-Pay"). CEO pay is set by the Board of Directors, which is imperfectly informed of CEO skill and biased towards offering a high wage. Shareholders, whose beliefs about the CEO may differ from the Board’s, decide to pass or fail the Say-on-Pay (SOP). Failed votes are perceived as costly by the Board and shareholders. To match observed pay levels and failure rates, the cost of SOP failure to the Board (shareholders) must be equivalent to 2.06% (0.76%) of firm value. The Board cost reveals that the (off-equilibrium) threat of SOP failure disciplines wages, even with high SOP support; yet shareholder impact on wages is limited by their own cost. Using my estimates, I construct a counterfactual SOP mechanism in which a focal shareholder holds an advisory position on the Board; this mechanism lowers the SOP failure rate, decreases wages and increases firm value.