World Class Faculty & Research / April 22, 2015

'Say on Pay' Curbs Excessive Compensation—in Some Cases

SMITH BRAIN TRUST -- Say on Pay, which gives shareholders a nonbinding vote on executive compensation, leads companies to reduce excessive pay in certain circumstances. That's according to new research by Russ Wermers, a professor of finance at the University of Maryland's Robert H. Smith School of Business, and Miriam Schwartz-Ziv, a professor of business at Michigan State University. Academic studies of Say on Pay have found mixed results, with some concluding that the provision—part of the Dodd-Frank legislation and in effect since 2011—has had no effect. But Wermers says: "Say on Pay does empower small institutional shareholders. To protest pay, they can do something besides sell their shares."

He says the effect could be interpreted as being relatively minor, but Say on Pay does have statistically significant impact. "It's a step in the right direction," he says.

Companies appear to reduce pay in one specific scenario that involves interaction between small institutional shareholders and large "blockholders." Blockholders are defined as shareholders that hold at least 5 percent of a company's stock.In general small shareholders are more likely to vote against management on pay questions than blockholders are. "Large shareholders tend to not want to air their dirty laundry in public," Wermers says. However, when small shareholders vote against management's pay proposal and one or more large nonexecutive blockholders is present, the company tends to reduce the excessive compensation in the next year. In addition, in those circumstances management shifts toward picking a more reasonable peer group of companies when setting pay in the subsequent year.

What appears to be happening, the authors propose, is that after the small institutional shareholders express their discontent over pay by voting "no" in the SOP proceedings, blockholders privately pressure management. "Blockholders act like sleeping watchdogs," Wermers says. "They don't want to express their views through SOP votes. But the presence of a sizable vote against management wakes them up, and leads them to do something." 

Bolstering this theory was the observation that when small shareholders vote against a company's pay provisions, and no blockholders are present, management tends not to modify its pay packages. (In studying the role of blockholders in limiting executive pay, the authors omitted executive blockholders, who would be unlikely to vote against their own compensation.)

Wermers and Schwartz-Ziv examined the votes of 8,307 mutual funds, from 2011 through 2013. Mutual funds cast 36 percent of all Say on Pay (SOP) votes, and the authors argue that mutual funds votes are quite likely representative of the votes cast by institutional shareholders, which cast 87.8 percent of all votes cast.

Mutual-fund families varied a great deal in their willingness to protest pay. BlackRock Advisors, for example, voted against management 20 percent of the time, while Rydex Investments never did. When funds voted against management, they did so in a pattern anticipated by the authors of the Say on Pay rule: They were likely to vote against pay packages when that pay was out of line with industry norms, or when companies had picked inappropriate peers for benchmarking.

In some cases, the CEO was also more likely to depart in the year after a negative SOP vote.

Schwartz-Ziv says that the research may understate the effect that Say on Pay is having:"Multiple practitioners we have talked to have told as that Say on Pay has completely changed the dialogue between shareholder and executives."

"Do Small and Large Shareholders Govern Their Companies Through Public Votes? Evidence from Say on Pay," by Miriam Schwartz-Ziv and Russ Wermers, is a working paper.


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The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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