The impact of say-on-pay on executive compensation

We investigate the impact of say-on-pay on 2010 executive compensation, finding that affected firms reduced compensation and made it more performance-based in advance of the initial 2011 vote, with the decrease being greater for firms that previously overpaid their CEOs. We also find that the percentage of votes cast against executive pay is lower when the firm reduced executive compensation in advance of that initial say-on-pay vote, but higher when the firm pays higher total compensation, has a large increase in compensation, has a larger amount of compensation that cannot be explained by economic factors, or has a higher amount of “other compensation,” a category which includes perquisites. Last, but not least, we find that the tone and prominence of the Compensation Discussion and Analysis (CD&A) are associated with the vote, as is the recommendation of Institutional Shareholders Services.