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


Göx, Robert; Imhof, Frédéric; Kunz, Alexis H (2010). ‘Say on Pay’ design and its repercussion on CEO investment incentives, compensation, and firm profit. SSRN Electronic Journal 1588682, University of Zurich.

Abstract

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.

Abstract

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2010
Deposited On:23 Jul 2013 06:24
Last Modified:05 Apr 2016 16:52
Series Name:SSRN Electronic Journal
Number of Pages:31
ISSN:1556-5068
Publisher DOI:https://doi.org/10.2139/ssrn.1588682
Other Identification Number:merlin-id:8269

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