"Does Say on Pay Matter? Evidence in the U.S." 

NATASHA BURNS, University of Texas, San Antonio
Email: natasha.burns@utsa.edu
KRISTINA MINNICK, Bentley University
Email: kminnick@rhsmith.umd.edu

When companies receive Say on Pay (SOP) proposals, the proposal highlights executives’ compensation, potentially resulting in the company altering its compensation policies. In this paper we investigate the effect of Say on Pay (SOP) proposals on changes in the level and make-up of executive compensation. Relative to non-SOP firms, SOP firms’ total compensation does not significantly change after the proposal. However, the firms that received SOP proposals do alter how they compensate their executives — shifting from cash compensation towards incentive compensation such as restricted stock grants and options. We find that firms whose CEOs are very well compensated are most likely to receive a proposal. Further, compensation of other executives as well as directors of SOP firms changes similarly to that of CEOs following the proposal, although non-CEO executives’ total compensation does decrease significantly, in contrast to that of CEOs.

"An Unfortunate ‘Tail’: Reconsidering Risk Management Incentives after the Financial Crisis of 2007-2009" 

University of Colorado Law Review, Vol. 81, No. 1, 2010

DOUGLAS O. EDWARDS, University of Colorado Law Review
Email: douglas.edwards@colorado.edu

In recent months, the legal academic community has taken a greater interest in the practice of risk management. Doubtless a response to the recent financial crisis, many have concluded that our current market structure allows for uninhibited risk taking and the pooling of systemic risk. Accordingly, most have suggested a regulatory response is necessary. This Comment, in unreserved agreement with these writers, attempts to contribute to this literature in two ways.

First, this Comment explains the development of quantitative risk management to fill in the gaps in the existing legal research. Though I present nothing groundbreaking, my purpose is to provide legal professionals with a brief but not overwhelming account of the industry’s recent rise to power. Following this initial discussion, I then return to the current risk-management debate and, making a second contribution to the recent academic literature, I build on the incentive modeling and regulatory suggestions presented by Professor Karl Okamoto is his recent article, After the Bailout: Regulating Systemic Moral Hazard. In pertinent part, I recommend that policymakers implement a new disclosure regime and a compensation clawback private right of action to realign informational incentives in risk-based decision making. In the end, this Comment in no way seeks to be the last word in this discussion. And, with luck, I hope that it will not be. The recent financial crisis has exposed more than a few shortcomings in our financial regulation latticework, and we would do well to honestly discuss these limitations. Though politically less palatable than the previous century’s approach to financial regulation, it may be time to seriously consider regulating not only executive compensation, but secondary manager compensation. As this Comment suggests, much ill-advised wrongdoing can be captured by making these difficult decisions.

"Executive Pay, Talent and Firm Size: Why has CEO Pay Grown so Much?" 

UNSW Australian School of Business Research Paper No. 2009FIN01

JAEYOUNG SUNG, Ajou University
Email: jaeyoungsung@ajou.ac.kr
PETER L. SWAN, University of New South Wales (UNSW)
Email: peter.swan@unsw.edu.au

We exposit an integrated agency model of multi-period career concerns and labor market equilibrium with managerial reservation utility levels, and thus pay levels, determined endogenously for firms of different sizes. Based on observations from a long time-series of S&P 1500 companies, we estimate the stochastic production function describing the incremental wealth created by the manager as a function of “effort”, latent raw “talent”, idiosyncratic firm risk (asset volatility) and the opening value of assets employed. We show that CEO talent affects the marginal productivity of the firm at approximately twice the rate as effort. Since asset volatility is also more subject to scale effects than effort, risk per marginal product of effort is higher in larger firms. Due to the cost of compensating managers for risk, pay-performance sensitivity optimally declines with size. Furthermore, our talent estimates explain much of the increments to real CEO pay levels and income over recent decades as a response to increases in talent and as compensation for higher risk borne by executives, with firm size growth playing a negligible role. We also identify the most talented CEOs who earned enterprise returns 17 times higher than the CEOs of the largest firms.

"The Untold Story of Underwriting Compensation Regulation" 

UC Davis Law Review, Forthcoming
Arizona Legal Studies Discussion Paper No. 10-13

WILLIAM K. SJOSTROM, University of Arizona - James E. Rogers College of Law
Email: william.sjostrom@law.arizona.edu

The Article examines the regulation of underwriting compensation by the Financial Industry Regulation Authority. Although the regulation dates back almost 50 years and impacts virtually every U.S. public offering of securities, its propriety has received zero attention from legal scholars. The Article fills the gap in the literature. In that regard, it provides a history and overview of the regulation and critiques its policy justifications. The Article finds the justifications deficient and the regulation’s costs conceivably quite large. Consequently, it contends that the regulation should be abolished.

"‘Say on Pay’ and its Repercussion on CEO Investment Incentives, Compensation, and Firm Profit" 

ROBERT F. GÖX, University of Fribourg (Switzerland) - Faculty of Economics and Social Science
Email: robert.goex@unifr.ch
FRÉDÉRIC IMHOF, University of Lausanne - Faculty of Business and Economics
Email: frederic.imhof@unil.ch
ALEXIS H. KUNZ, University of Lausanne - Faculty of Business and Economics
Email: alexis.kunz@unil.ch

We conduct an experiment to study different shareholder voting right regimes in a setting where shareholders provide incentives to a CEO for a risky project choice through a discretionary bonus scheme. We compare three different types of shareholder voting rights (advisory, unconditionally binding, and conditionally binding voting rights) to the baseline case where shareholders have no say on CEO pay. We make the following observations: (1) Advisory and conditionally binding voting rights do not distort CEO investment incentives. Unconditionally binding voting rights adversely affect the CEO’s investment incentives. (2) Unconditionally binding voting rights are an effective instrument to curb executive compensation. Advisory shareholder voting rights have the opposite effect and can even increase executive compensation. (3) Most shareholders reject CEO bonus proposals whenever they have the right to do so. This effect is independent of the type of voting right in place and becomes more pronounced in case of poor project performance. (4) Advisory and conditionally binding voting rights have only limited impact on firm profit and executive compensation. In contrast, unconditionally binding voting rights reduce both, firm profit and executive compensation significantly. Overall, our results suggest that regulators should carefully evaluate dysfunctional economic consequences of shareholder voting rights before they are introduced or before existing rules are tightened.

"Say on Pay's Bundling Problems" 

Kentucky Law Journal, Forthcoming

ANDREW LUND, Pace University School of Law
Email: alund@law.pace.edu

A mandatory Say on Pay rule would require public firms to provide shareholders with an opportunity to cast an advisory vote regarding its most recent year’s executive compensation. Like other efforts to increase shareholder power, Say on Pay has attracted criticism from those who fear that empowering shareholders will harm firms. This Article instead offers a critique of Say on Pay internal to the shareholder empowerment movement. The problem with Say on Pay is that its ex post nature neuters its ability to influence executive pay at high-performing firms. This hypothesis has been borne out by the experience with Say on Pay in the U.K. where a mandatory version has been in effect for seven years. There, Say on Pay resulted in compensation-related discipline at poorly-performing firms, but not at high-performing firms. The reason for this disparity appears to be not entirely or even significantly related to shareholder preferences or monitoring costs. Alternatively, this Article suggests that Say on Pay suffers from bundling problems insofar as shareholders reasonably fear offending executives via an adverse Say on Pay vote. Those problems are more significant at high-performing firms where the potentially offended executives are believed to be more valuable. The Article suggests that the bundling problems can be mitigated by switching from an ex post to an ex ante vote and provides a first attempt at a CEO Compensation Plan approval requirement.

"Say on Pay Votes and CEO Compensation: Evidence from the UK" 

FABRIZIO FERRI, New York University - Stern School of Business
Email: fferri@hbs.edu
DAVID A. MABER, University of Southern California - Leventhal School of Accounting
Email: maber@marshall.usc.edu

We examine the effect on CEO pay of new legislation introduced in the United Kingdom at the end of 2002 that mandates an annual, advisory shareholder vote (“say on pay”) on the executive pay report prepared by the board of directors. We find no evidence of a change in the level and growth rate of CEO pay after the adoption of say on pay. However, we document an increase in its sensitivity to poor performance. The effect is more pronounced in firms with high voting dissent but extends more generally to firms with excess CEO pay, regardless of the voting dissent, suggesting that some firms responded to threat of a negative vote by acting ahead of the annual meeting. Evidence on explicit changes to CEO pay contracts made in response to specific shareholder requests confirms a shift toward greater sensitivity of CEO pay to poor performance. These findings are consistent with calls to eliminate “rewards for failure” that led to the introduction of say on pay and may be of interest to regulators and investors who are pondering the merits of say on pay in the US and other countries.