Emprical evidence on Say on Pay

Posted by Marc Hodak on June 4, 2009 under Executive compensation, Politics | Be the First to Comment

There has been a lot of talk about Say on Pay, i.e., putting executive compensation packages up for shareholder vote.  The U.S. government about to force every public company to submit to this policy.  This is considered a corporate governance matter, i.e., something for the putative benefit of the shareholders.  Unfortunately, debates over corporate governance policies rarely offer analysis of how the shareholders are actually likely to fare under a given policy.

Jie Cai and Ralph Walking of Drexel University recently published such an analysis for Say on Pay.  The results will startle, well, no one.

Basically, they found that firms “with high abnormal CEO compensation and low pay for performance” benefit under a Say on Pay regime.  If the CEO does not fall into the overpaid camp, Imposing Say on Pay will destroy value for the firm.

So, what is the net effect on shareholders if we impose Say on Pay on every public company, where the vast majority of them do not have overpaid CEOs? That’s right–shareholders as a class will suffer.  But, hey, it’s a small price for the shareholders to pay so that our politicians can demogogue the issue for a few extra votes.  And in the new definition that whatever is good for our politicians is “patriotic,” shareholders of well-governed firms should feel pretty darn proud.