In the paper, Shareholder Votes and Proxy Advisors: Evidence from Say on Pay, which was recently made publicly available on SSRN, my co-authors (Yonca Ertimur of Duke University and David Oesch of the University of St. Gallen) and I examine the analyses underlying the voting recommendations issued by Institutional Shareholder Services (ISS) and Glass Lewis & Co. (GL), the two most influential proxy advisors, for the non-binding vote on executive pay mandated by the Dodd-Frank Act, also known as “say on pay” (SOP). We then investigate the effect of these recommendations on shareholder votes, stock prices and firm’s behavior. Due to the complex and highly firm-specific nature of executive compensation, mandatory SOP votes provide an especially powerful setting to examine the analyses performed by proxy advisors and their impact.

Our analysis of the SOP-related part of the ISS and GL proxy reports for S&P 1500 firms in 2011 shows that both advisors provide a quantitative and qualitative examination of the executive pay plan (structured around certain categories, e.g. pay for performance, disclosures), assign a rating for each category and issue a final voting recommendation (For or Against). ISS issues Against recommendations for 11.3% of the firms and GL for 21.7%, suggesting a more aggressive stance by GL. The difference also reflects the different approaches ISS and GL follow in assessing the “pay for performance” category, a key driver of the final recommendation, with ISS focusing its analysis of pay practices mostly on poorly performing firms. Firms receiving an Against from ISS are not a subset of those receiving an Against from GL. Rather, among firms with potentially questionable executive compensation practices (i.e. firms with an Against from at least one proxy advisor), ISS and GL agree on which firms warrant an Against only in 17.9% of the cases. We interpret this as evidence that the complex nature of SOP has allowed proxy advisors to differentiate themselves from each other. Additional analysis suggests that neither proxy advisor applies a “one-size-fits-all” approach in evaluating the compensation plans for the 2011 proxy season. Specifically, there are numerous cases where the proxy advisors identify similar controversial provisions yet issue different recommendations, based on firm-specific circumstances and other elements of the pay plan.

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