Broc's Blog yesterday discussed a study recently reported by The Conference Board ("Power to the Principals! An Experimental Look at Shareholder Say-on-pay Voting," which conducted two experiments simulating say-on-pay votes. This study strongly supported what most executive compensation professionals have recognized since the inception of shareholder say on pay voting: Shareholders only care about CEO pay when stock performance is below average. 

However, what I found most interesting in the study's results, was the strategic importance of these two paragraphs:

The results of the second experiment confirmed those of the first experiment: shareholders only cared about high CEO pay if they lost money. In other words, investors make voting decisions based first on the performance of the company. When performance is good, investors don't care about CEO pay. It's only when company performance is poor that shareholders consider CEO pay and voice their displeasure with a "no" vote when CEO pay is misaligned with company performance (high CEO pay and low company performance).

Our results provide clear evidence that shareholders, even those acting in the role of institutional shareholders, only weigh their own losses when deciding whether to approve a SOP ballot. The findings indicate that underpayment was not of concern to the shareholders. While it can be argued that it is not the shareholder's role to reject CEO pay when it is low relative to performance, the failure to do so can have important implications for companies. For example, if the company is under-rewarding the CEO relative to the performance delivered, the CEO may leave to seek better opportunities elsewhere.

I hesitate to argue for higher CEO pay. However, if experience and empirical evidence tell us that it is much easier and more warmly received by shareholders to reduce CEO pay than it is to increase it (much less problematic from the shareholders' perspective), then shouldn't rationale actors on compensation committees err on the side of slightly overpaying a new CEO (or slightly overpaying an existing CEO during good times - periods of good stock price performance)? If performance declines, the Company/Committee will be rewarded for reducing the compensation but it might be punished for leaving it the same.