The First Year of "Say on Pay" Under Dodd-Frank: An Empirical Analysis and Look Forward

Using voting data from the first year of say-on-pay votes under DoddFrank, we look at the patterns of shareholder voting in advisory votes on executive pay. Consistent with the more limited say-on-pay voting before DoddFrank, we find that shareholders in the first year under Dodd-Frank generally gave broad support to management pay packages. But not all pay packages received strong shareholder support. At some companies, management suffered the embarrassment of failed say-on-pay votes—that is, less than fifty percent of their company’s shareholders voted in favor of the proposal. In particular, we find that poorly performing companies with high levels of “excess” executive pay, low total shareholder return, and negative Institutional Shareholder Services (“ISS”) voting recommendations experienced greater shareholder “against” votes than at other firms. Although say-on-pay votes are non-binding and corporate boards need not take action even if the proposal fails, most companies receiving negative ISS recommendations or experiencing low levels of say-on-pay support undertook additional communication with shareholders or made changes to their pay practices, reflecting a shift in the management-shareholder dynamic. During 2012, the second year of say-on-pay under Dodd-Frank, we find similar patterns, with companies responding proactively to an unfavorable ISS recommendation or a prior failed (or even weak) say-on-pay vote in 2011. We use four case studies to illustrate this new corporate governance dynamic, which we view as an important consequence of the Dodd-Frank Act.