As proxy season gets underway, executive compensation issues are again being considered. Corporate Counsel noted that with the SEC now requiring shareholder “say-on-pay” votes, some directors are feeling left out. A recent survey found that 71 percent of directors believed that they should be able to exercise some discretion when setting executive compensation.
A recent paper by finance professors Mathias Kronlund of the University of Illinois at Urbana-Champaign and Shastri Sandy of the University of Missouri at Columbia studied the effect of say-on-pay votes. Summarized in the HLS Forum on Corporate Governance and Financial Regulation, the paper found that executive compensation packages changed during years in which shareholder say-on-pay votes were cast. It concludes that the “say-on-pay mandate has not unambiguously resulted in more efficient CEO compensation. And contrary to the goals of the say-on-pay regulation, the net result of these changes may be higher, not lower, total compensation.” However, the authors further note that “because CEOs receive more stock awards in voting years, which in turn will make their wealth more closely aligned with that of shareholders going forward, it is possible that pay in these years is more efficient, despite being higher.”
The Economist summarized the findings of a paper which studied the effect of a different SEC rule on executive compensation. The paper, “Do Compensation Consultants Enable Higher CEO Pay? New Evidence from Recent Disclosure Rule Changes,” analyzes the effect of the SEC rule which requires firms to disclose the fees it pays to consultants unless the consultant only provides compensation advice.
Another executive compensation study summarized in the HLS Forum on Corporate Governance considered “Executive Compensation in Controlled Companies.” The paper, authored by Harvard Law School Program on Corporate Governance fellow Kobi Kastiel, challenges the accepted wisdom that assumed that “the presence of a controlling shareholder should alleviate the problem of managerial opportunism because such a controller has both the power and incentives to curb excessive executive pay.”