‘Say on Pay’ design and its repercussion on CEO investment incentives, compensation, and firm profit

We conduct an experiment to study different shareholder voting right regimes in a setting where shareholders provide incentives to a CEO for a risky project choice through a discretionary bonus scheme. We compare three different types of shareholder voting rights (advisory, unconditionally binding, and conditionally binding voting rights) to the baseline case where shareholders have no say on CEO pay. We make the following observations: (1) Advisory and conditionally binding voting rights do not distort CEO investment incentives. Unconditionally binding voting rights adversely affect the CEO’s investment incentives. (2) Unconditionally binding voting rights are an effective instrument to curb executive compensation. Advisory shareholder voting rights have the opposite effect and can even increase executive compensation. (3) Most shareholders reject CEO bonus proposals whenever they have the right to do so. This effect is independent of the type of voting right in place and becomes more pronounced in case of poor project performance. (4) Advisory and conditionally binding voting rights have only limited impact on firm profit and executive compensation. In contrast, unconditionally binding voting rights reduce both, firm profit and executive compensation significantly. Overall, our results suggest that regulators should carefully evaluate dysfunctional economic consequences of shareholder voting rights before they are introduced or before existing rules are tightened