CEO pay finds a better way

The evidence from the experience with say on pay has recently been reviewed in the study, Say on Pay Votes and CEO Compensation: Evidence from the UK, by Fabrizio Ferri and David Maber.

Three sets of analyses were undertaken. Firstly, the authors find higher 'no' votes for companies with weak "pay penalties” for poor performance, e.g. companies with excess CEO pay combined with poor performance and companies with generous severance contracts, which can weaken penalties in the event of poor future performance.

Second, they found that companies reacted to high "no” votes by changing executive pay. They compared changes to compensation contracts made by high dissent companies (i.e., companies that experienced more than 20 per cent voting dissent) before and after the first say on pay vote, with changes made by a matched sample of low dissent companies (i.e., companies that experienced less than 5 per cent voting dissent but with otherwise similar characteristics).

Analyses indicate that, after the vote, high dissent companies were more likely to remove provisions viewed as "rewards for failure” (e.g., generous severance contracts, provisions allowing the retesting of performance conditions), often in response to institutional investors’ explicit requests, and reaped the benefits in terms of lower or no dissent at the following year’s annual meeting. Low dissent companies were more likely to remove such provisions before the vote, presumably in a (successful) effort to avoid voting dissent.

These different patterns of behaviour around the vote for high and low dissent companies suggest that the observed changes were the direct result of say on pay.

The third set of analyses found a significant improvement in CEO pay sensitivity to performance. The authors employed regression analysis to evaluate the sensitivity of CEO pay to realised performance and other economic determinants before and after say on pay regulation. Using a large sample of UK companies, they found a significant increase in the sensitivity of CEO pay to poor performance (particularly in high dissent companies and companies characterized as having excess CEO pay before the adoption of say on pay), while the relationship between pay and other economic determinants remained unchanged.

It thus appears that say on pay has a moderating effect on the level of CEO compensation at poorly performing companies. Interestingly, the authors did not find a similar effect in a control sample of UK companies not subject to say on pay, UK companies traded on the Alternative Investment Market.

Taken together with their evidence of explicit changes to compensation practices, these additional tests support a causal interpretation of the researchers’ findings.

Overall, the study suggests that UK investors perceived say on pay to be a value enhancing monitoring mechanism, and were successful in using say on pay votes to pressure companies to remove controversial pay practices and increase the sensitivity of pay to poor performance.

Guerdon Associates is an independent consulting firm operating from Sydney and Melbourne that provides advice on executive and director remuneration, performance management, governance, and employee equity data and solutions.

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Nice story (CEO pay finds a better way, June 16). The real tragedy is that the CEO pay game is a closed shop. Because most of the shares in a company are owned by institutional investors (other companies) it is mostly a forgone conclusion when the usually only item on the agenda at an AGM is director and CEO pay. Because CEOs of the shareholder companies eventually get a flow on effect they almost never vote against a pay deal.
It is a closed shop and this is why CEO pay has grown at such an alarming rate and has far outstripped any other sector. One can understand why ordinary Australians get offside when the captains of business have their snouts well and truly into the feeding trough whilst the same people have their business representatives get in front of the cameras to squeal "we will be ruined" when average workers just want a minuscule rise to keep up with rising prices of things like food and electricity.
If we had fair minded governments then the institutional companies would have their voting power limited to say only 20 per cent of their actual holding so that this rort was put to an end. I'm not holding my breath that what is fair will ever happen though.