Chief executives’ pay raises shrink and company values go up when shareholders get to vote on top executives’ pay levels, according to a study by University of Georgia and Federal Reserve researchers.
After studying pay and financial data for 17,000 public companies in 38 countries, the researchers found that CEO pay levels lagged by 7 percent in the 11 nations that adopted so-called “say-on-pay” laws.
Likewise, investors in countries that adopted the say-on-pay laws got an extra dividend, the researchers found, because firms’ market values increased compared to the nations that didn’t adopt such laws.
“We were surprised to find that after the laws were passed, there was still an increase in CEO pay. Critics argue that the pay increase means the laws are ineffective,” said University of Georgia finance professor Ugur Lel, one of the study’s authors.
But he said that interpretation is wrong. “What we see is that while CEO pay still goes up, it actually increases at a lower rate after say-on-pay laws are enacted,” he said.
The United States adopted a say-on-pay rule as part of the 2010 Dodd-Frank financial reform law that the Obama administration championed after the 2008 financial crisis. The rule requires publicly-held companies to give shareholders a non-binding vote on whether they approve of top executives’ pay packages.
President Donald Trump vowed during his campaign to dismantle the sweeping Dodd-Frank law, and he has since rolled out a number of proposals or executive orders to undo parts of the law regulating banking and other financial industries.
But Trump so far hasn’t targeted Dodd-Frank’s say-on-pay rule.
The say-on-pay votes have sometimes swayed local companies to cut CEO pay and retool executive pay policies.
After Coca-Cola shareholders' vote on 2012 pay, Coca-Cola trimmed top executives' pay and met with large investors such as pension plans and mutual fund companies. Then-CEO Muhtar Kent's pay dropped from $30.5 million in 2012 to $20.4 million in 2013. Last year — Kent's last full year as CEO — his pay was $17.6 million, including the increased value of his pension benefits.
According to findings by Ugur and Ricardo Correa, with the Federal Reserve, the say-on-pay rules have had a “significant” effect on companies’ pay policies, especially at firms with poor stock or financial performance, long-tenure CEOs or weak boards of directors.
At companies in the bottom quarter by stock performance, CEO pay levels fell behind by more than 9 percent after the say-on-pay laws were enacted, compared to companies in nation’s that didn’t adopt similar laws.
At companies where the researchers determined that CEO pay was excessive, based on economic measures of their firms’ performance, CEO pay dropped almost 19 percent, the researchers said.
The researchers also found that pay disparities between CEOs and other top executives in the companies tended to narrow after the say-on-pay laws were enacted.
“There is sometimes a big pay discrepancy there because companies want to set up tournament incentives so that everyone keeps working hard to get the top spot. Other people say that CEOs have more sway over their own pay than other senior executives,” Lel said.
“But we find that once say-on-pay laws go into effect, the pay difference between the CEO and top managers gets closer together — and the value of the firm actually goes up,” he added.
The researchers also found that the say-on-pay laws’ effects are nearly as strong for shareholder votes that are non-binding, as they are in the United States, as for binding votes such as those in the United Kingdom.
Their study appears in the Journal of Financial Economics.
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