By Olivia Berkman
A close look at the first five years of the “Say on Pay” portion of Dodd-Frank regulatory reform reveals that the law may not be having the intended impact on publicly-traded U.S. issuers.
For under-performing firms, Say on Pay was shown to be a useful tool for disciplining management, but when firms performed well shareholders did not appear to care about excess pay. More worryingly, the study argues that the close connection between voting results, stock price and firm performance raises the risk of increased short-termism.
When implemented in 2010, Say on Pay was designed to rein in excessive levels of executive compensation and encourage boards to tie executive pay more closely to performance when it was included in the Dodd–Frank Wall Street Reform and Consumer Protection Act. It offered shareholders a mechanism to veto management compensation plans.
According to a
new Institute for Law and Economics research paper that studied S&P 1500 companies between 2010 and 2015, economic performance has had a significant impact on pay voting outcomes, especially for poorly-performing issuers. But if the issuer was performing well, concerns over pay level or sensitivity of pay to performance did not lead investors to vote against the pay package.
“If say on pay then is about curbing excessive or inordinate compensation, it seems to be a rough and inadequate tool,” the study authors state.
The broad conclusion of the researchers is that while shareholder voting may be a poor tool to address public concerns about the size and structure of executive compensation, it is more notable that shareholder support for executive pay seems to be highly correlated with an issuer’s short term stock performance.
“The say on pay vote may be counterproductive to the extent that it heightens executives’ incentives to focus on short term stock price at the potential cost of working to enhance firm value,” the authors state.
President Donald Trump’s promise to repeal parts of Dodd-Frank
could mean an end to the Say on Pay requirement, though issuers could voluntarily allow their shareholders to vote on executive pay. With the introduction of the Financial Choice Act, which would retain the statute but limit its application, policy makers must evaluate say on pay carefully.