Does Shareholder Scrutiny Aect Executive Compensation? Evidence from Say-on-Pay Voting

Following the Dodd-Frank Act of 2010, public firms must periodically hold advisory shareholder votes on executive compensation (say on pay). We examine how firms change the structure of executive compensation in anticipation of having a say-on-pay vote. Our identification strategy exploits the fact that some firms only hold votes every two or three years, which results in predictable within-firm variation in whether a particular year’s pay will be subject to a vote. We find that firms reduce salaries to CEOs but increase their stock awards, pensions, and deferred compensation in anticipation of having a vote. The additional pay (mainly from stock awards) outweighs the reduction in salaries, so total pay is higher in years with a vote. These results show that increased shareholder scrutiny—in the form of holding say-on-pay votes—changes how executives are compensated. However, these changes seem mainly to improve the “optics” of pay, and, contrary to the goals of the say-on-pay regulation, result in higher, not lower, total pay.