Not really, according to this study by academics from the University of Pennsylvania Law, Rutgers Business and Berkeley Law Schools to be published in the Harvard Business Law Review. Say on pay was initiated under a Dodd-Frank mandate adopted against the backdrop of the 2008 financial crisis, largely in reaction to the public’s railing against the levels of compensation paid to some corporate executives despite poor performance by their companies, especially where those firms were viewed as contributors to the crisis itself. Say on pay was expected to help rein in excessive levels of compensation and, even though the vote was advisory only, ascribe some level of accountability to boards and compensation committees that set executive compensation levels. So far, however, say-on-pay votes have served largely as confirmations of board decisions regarding executive compensation and not, in most cases, as the kind of rock-throwing exercises that many companies had feared and some governance activists had hoped. The study reported that, since 2011, the average annual percentage of say-on-pay votes in favor has exceeded 90%, while “the percentage of issuers with a failed say on pay vote has never exceeded 3% and, in 2016, that number dropped to just 1.7%.” The study examined what the few failed (or low) votes really meant.

The study examined say-on-pay votes of the S&P 1500 between 2010 and 2015, exploring the impact of “three factors on voting outcomes—pay level (excess compensation), sensitivity of pay to performance, and economic performance.” Excess compensation was defined as the amount of compensation exceeding a predicted compensation level based on specified economic determinants. CEO pay-performance sensitivity measured CEO pay on an ex ante basis—“expected pay for future performance.” The authors considered a say-on-pay vote to be “low” for purposes of the study if the percentage “against” vote was 20% or more. Applying that criterion, the authors found that 13.6% of say-on-pay proposals received a low vote.

According to the study, while both excess compensation and pay-performance sensitivity affected the level of shareholder support, “even after controlling for these variables, a critical additional driver of low shareholder support for executive compensation packages is the issuer’s economic performance.” More specifically, the study found that higher levels of excess compensation were correlated with lower shareholder support and that higher CEO pay-performance sensitivity was correlated with a lower probability of a low vote. But the most significant findings related to the impact of economic performance in the one year prior to the say-on-pay vote. With regard to the variable of stock-price performance, the study found that shareholders were only “somewhat sensitive” to excess CEO pay when stock-price performance was strong:

“[e]ven firms in the highest quartile of excess CEO pay receive only 11.4% of votes against their compensation package if they are in the top quartile in terms of stock price performance. By contrast, for firms with the same level of excess pay but that are in the lowest performance quartile, the level of negative votes almost doubles.

“Relatedly, poor stock price performance appears to result in greater shareholder dissatisfaction with executive pay packages even in the absence of excess compensation. In particular, for the firms in the lowest quartile with respect to excess compensation, overall levels of say on pay dissent are quite low. Nonetheless, the percentage of votes cast against the pay package increases by 41% as we move from the highest performing firms to the lowest performers. This increase appears to be driven, not by pay, but by stock price performance. The most compelling situation is the fact that, in our sample, we have 149 cases in which even though the CEO received no excess compensation, the percentage of shares voted against the compensation package exceeded 20%.”

The study concluded that company economic performance may be just as—if not more—pivotal to the outcomes of say-on-pay votes than pay itself: the study’s “key finding is the importance of economic performance to say on pay outcomes. Although pay-related variables affect the shareholder vote, even after we control for those variables, an issuer’s economic performance has a substantial effect and, perhaps most significantly, shareholders do not appear to care about executive compensation unless an issuer is performing badly. In other words, the say on pay vote is, to a large extent, say on performance.” [Emphasis added.]

The study also looked at the impact of these same factors on ISS recommendations, as well as the effect of those recommendations on vote outcomes. While, not surprisingly, excess compensation was found to be “a significant driver of an ISS ‘no’ recommendation,” a higher pay-performance sensitivity was found to be more likely to produce a negative ISS recommendation, an unexpected result given the ISS focus on pay-performance alignment. The authors, however, attribute that outcome to a difference in methodology: in contrast to the authors’ ex ante approach, “ISS calculates pay-performance sensitivity on an ex post basis—that is, pay relative to realized performance.” The study also found that companies with poor economic performance were more likely to receive negative say-on-pay recommendations from ISS. The analysis showed that ISS recommendations do influence voting outcomes to a substantial degree, but they do “not fully explain the voting results.” The authors attribute “the substantial gap between ISS recommendations on say on pay and voting outcomes” to the difference between how investors and ISS appear to evaluate pay/performance sensitivity, that is, the focus of ISS on “realized pay for performance rather than ex ante pay.” The study found that “investors are more likely to support pay packages in which the CEO’s pay is highly sensitive to performance on an ex ante basis, that is, when the pay package more closely aligns the CEO’s incentives with shareholder interests.” Ultimately, the authors questioned whether ISS’s “methodology is most appropriate” for its purpose.

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Does size matter? Yes, according to the study. The authors observed that “shareholders are less likely to vote against pay packages at large issuers. The result is interesting both because pay levels tend to increase with issuer size and because the percentage of institutional ownership is also correlated with issuer size. To the extent that institutional investors are more likely to be critical of executive pay, as some commentators have observed, this result is in tension with that hypothesis.” The study also found, after looking at the control variables, “that smaller companies and those with higher R&D expenses are more likely [to] get a no recommendation from ISS. The latter is particularly troubling. Commentators have argued that shareholders that focus unduly on short term profitability may pressure executives to cut R&D, sacrificing long term growth in favor of short term profitability. Our findings imply that the ISS recommendation may contribute to this scenario.” (See this PubCo post, discussing the impact of “short-termism” on R&D spending.)

What do these results mean for say on pay? The authors considered the results related to company performance variables to be “dramatic and potentially troubling.” As noted above, the study showed that shareholders did not vote against say on pay at significant levels as long as companies had strong stock price performances, even “when their CEOs receive substantial excess compensation.” In contrast, “shareholders may be unduly critical of pay packages at issuers that have experienced poor economic performance, even when such pay packages do not appear problematic.” In effect, the authors argue, “the say on pay vote, which purports to provide shareholders with a vehicle to express their views on the issuer’s compensation plan is, in fact, at least partially, a referendum on firm performance.”

As a result, say on pay may not be “operating as a useful tool for identifying potential problems with executive compensation, including structural problems that may create risks for the sustainability of that performance.” Accordingly, the authors raise questions about the value of say on pay, particularly as a circuit breaker for executive compensation, as originally intended:

“These findings are more problematic if say on pay is designed to reduce overall compensation levels consistent with broader societal objectives of equity or wealth distribution. To the extent that shareholder voting is driven primarily by economic performance, shareholder interests are likely to be imperfectly aligned with the interests of non-shareholder stakeholders. Thus, if Dodd-Frank was motivated by an effort to protect societal interests from excessive risk-taking motivated by high-powered compensation incentives or alternatively excess or inordinate pay alone, shareholder voting is unlikely to result in the appropriate compensation reforms.”

(Note that, from a historical perspective, the study observes that “CEO pay continued to rise for the first several years after Dodd-Frank, declined in 2015 and, most recently, in 2016, rose to record levels.” The impact, if any, has been on the structure of executive comp, with increases in the proportion of pay denominated “performance-based.”)

More significantly, the authors contend, the vote could actually be “counter-productive” if the effect is to signal to boards that near-term stock price performance is the most important variable, with the result that directors are encouraged to focus on the short term. And that may be exactly the signal that is sent: according to the authors, the study’s findings “demonstrate empirically the risk that say on pay voting may exacerbate rather than eliminate problems with executive pay structure. We show that shareholder support for executive pay is highly correlated with an issuer’s short term stock performance.” (For discussions regarding short-termism, see for example, this PubCo post, this PubCo post, this PubCo post, this PubCo post and this PubCo post.)

In addition, the authors contend, “say on pay could contribute not merely to short-termism, but to excessive risk-taking because of the correlation between risk and stock market performance.” The prevailing use of total shareholder return by ISS and as a performance metric by reporting companies “means that stock price dominates both the analysis of pay sensitivity and firm performance. Critically, however, TSR focuses largely on the alignment between stock price and pay rather than on the creation of long term economic value.” (See this PubCo post and this PubCo post.)

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The Financial CHOICE Act of 2017, which has passed the House but is languishing in the Senate, would amend the Exchange Act to require say-on-pay votes only in those years “in which there has been a material change to the compensation of executives of an issuer from the previous year.” (See this PubCo post.) In addition, the current administration has indicated its desire to eliminate Dodd-Frank altogether.