CEO Equity-Based Incentives and Shareholder Say-on-Pay in the U.S.

• In Event: CEO Reputation and Pay

Abstract

This paper examines the relationship between shareholder voting outcome (percent in favor or opposed) and executive equity-based incentive (pay-performance sensitivity and pay-risk sensitivity) as part of the "Say-on-Pay" provision of the 2010 Dodd-Frank Act. Prior literature has documented mixed effects of equity-based compensation. Our setting allows us to directly test whether shareholders perceive equity-based incentives as a source of or solution to agency problems. Consistent with our hypotheses, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay-performance sensitivity) and changes in stock volatility (pay-risk sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders and as a way to mitigate potential agency costs. We provide meaningful evidence of the importance of equity-based incentives from the perspective of those most concerned with firm value.

Authors

• Denton Collins, Texas Tech University

• Blair Marquardt, Texas Tech University

• Xu Niu, Texas Tech University