Diane K. Denis is Terrence Laughlin Chair in Finance and Professor of Business Administration at the University of Pittsburgh Katz School of Business; Torsten Jochem is Assistant Professor in Finance at the University of Amsterdam Business School; and Anjana Rajamani is Assistant Professor of Finance at Erasmus University Rotterdam School of Management. This post is based on their recent article, forthcoming in the Review of Financial Studies. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.
Growth in institutional ownership and activism combined with regulatory changes have led shareholders to play an increasingly important role in the governance of U.S. public firms. While a well-developed literature provides evidence on the direct effects of shareholder governance actions on the firms that are subject to them, there is scant evidence to date on the indirect effects for firms that are peers of the subject firms.
In our article, Shareholder Governance and CEO Compensation: The Peer Effects of Say on Pay, forthcoming in the Review of Financial Studies, we provide evidence on the spillover effects of say on pay voting. We document that firms undertake relative reductions in CEO compensation following their compensation peers’ weak say on pay votes. We define a weak say on pay vote as shareholder support in the bottom decile of Russell 3000 firms (less than 72.5%). We label firms that have weak-vote peers but do not themselves experience a weak vote as primary firms; they are the focus of our analysis. Firms that have neither a weak say on pay vote nor compensation peers that experience weak votes are our control firms. Changes in the CEO compensation of control firms serve as the counterfactual compensation change to which we compare the primary firm compensation changes.