‘Say on Pay’ Being Well Used so Far

That was a key conclusion of the paper, “Shareholder Activism and CEO Pay,” which also asserted shareholders resisted efforts to get co-opted by unions or other special interests groups and did not try to get too involved in the minute details of compensation policy and practice. The study was authored by Fabrizio Ferri of the Stern School of Business, New York University, Yonca Ertimur of Duke University, and Volkan Muslu of the University of Texas at Dallas.

In concluding that shareholders generally made judicious use of their executive comp input ability, the authors contended that such shareholder input tended to stay at a process level and selectively backed proposals giving stock owners approval rights for out-of-the ordinary items such as large golden parachute payments.

The result, according to the study: an average single-year chief executive officer pay drop of about $7.3 million—about 38%—at firms where pay was excessive.

The authors cited three primary reasons for backing ”say in pay”:

• Votes by shareholders on executive pay issues have tended not to be co-opted by union pension funds, activists or special interest groups;
• Such initiatives have been most effective with the most generous CEO compensation packages, which the paper claims contradicts claims that shareholders won’t be sophisticated enough to exercise their comment rights properly; and
• no-vote campaigns are generally more effective than shareholder proposals in curbing excess CEO pay.

No Votes on Directors  

The researchers noted that campaigns to vote directors off the board are more potent than pay proposals in lowering excessive pay, but shareholder advisory votes on pay are less costly and channel shareholders' dissatisfactions outside the context of director elections. Last month, The Securities and Exchange Commission (SEC) adopted changes to the federal proxy and other rules to facilitate the rights of shareholders to nominate directors to a company's board (see SEC Beefs up Proxy Access Regs).

The researchers studied a sample of 134 vote-no campaigns at Standard & Poor's 1500 firms and 1,198 nonbinding shareholder proposals relating to executive pay between 1997 and 2007. The paper can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1443455.  

Sweeping financial reform passed earlier this year included a number of corporate governance provisions, including giving shareholders a non-binding vote on executive pay and golden parachutes (see Financial Reform Measure Includes Compliance Provisions).