Are There Spillover Effects from Negative Say-on-Pay Votes?

Abstract

We provide evidence that when more than half of a firm’s voting shareholders disapprove of the executive pay plan, the spillover effects are significantly positive for peers of non-financial firms and significantly negative for peers of financial firms. The valuation effects are positively related to equity-based compensation and negatively related to cash-based and excess compensation. The no-votes are also associated with significant changes in compensation in the following year. In general, peer firms take action to align compensation with shareholder interests by lowering cash-based pay, increasing equity-based pay, and reducing excess compensation. Financial firms lower equity-based and excess compensation, suggesting they may alter pay in a manner that reduces regulatory pressure and the perception of CEO overpayment. Our results show far reaching effects from say-on-pay regulations, where even peer firms feel pressure to change their compensation following a no-vote.

Keywords: Say-on-Pay; Peer Effects; Compensation

JEL Classification: G30, G38, M41, M48