Krause Ryan

When Do Shareholders Care About CEO Pay?

Research by Ryan Krause, assistant professor of strategy, says: Say-on-pay votes turn negative when the firm is performing poorly.

May 20,  2014

By Ryan Krause, Assistant Professor of Strategy

High CEO compensation may be a hot topic of conversation in the media, but when shareholders have a voice in approving or rejecting pay, what are the determining factors in the decision?

Nearly four years after the Dodd-Frank Wall Street Reform and Consumer Protection Act required that publicly-traded companies allow for non-binding advisory votes from shareholders on executive compensation, there has been little examination on what factors influence these say-on-pay votes.

Two experiments simulating say-on-pay votes revealed that, regardless of whether CEO compensation was high or low, shareholders were more likely to approve the pay if firm performance was above average.

A recent Georgeson Report on failed say-on-pay votes reflected the same message: underperforming companies have a much higher rate of negative votes.

While it would seem that shareholders are tying compensation to performance, the results indicate that shareholders only responded negatively to high CEO pay at poor-performing firms, while they exhibited no difference in their approval of high or low CEO pay at high-performing firms.

Whether a say-on-pay vote passes or fails, top management compensation and the outcome of shareholder votes can have lasting implications on an organization.

Open communication from the organization about the basis for top management team pay, as well as clear information on the requirements for performance-based compensation, would provide opportunities for companies to ensure shareholder support.

“Power to the Principals! An Experimental Look at shareholder Say-on-pay Voting.” R. Krause, K.A. Whitler and M. Semadeni, Academy of Management Journal, 2014