SAY ON PAY
With my colleague Aditi Gupat, we have recently obtained core seed funding from the Department of Management to carry out an initial research on the impact of the new UK regulations on shareholder influence over listed companies’ compensation policies and remuneration reports (‘say on pay’ for short). Here are the rationale and summary of that project:
Excessive executive pay’ has arguably been the most hotly debated topic in corporate governance (CG) in recent years. Not only has it led to a public outcry about CEO pay in the UK, but also it has given rise to a strong investor reaction during the so-called ‘shareholder spring’ of 2012 and to a regulatory response by the UK government. Already in 2002, the Director Remuneration Report Regulations (DRRR) enhanced compensation disclosure and mandated an advisory shareholder vote (say-on-pay vote). The reform was welcomed by visible shareholder activism, led by the well-known rejection of GlaxoSmithKline’s director remuneration report in the initial year (Gordon, 2009). However, the percentage of dissent vote reduced in subsequent years (Davis, 2007; Conyon and Sadler, 2010) and the growth rate of CEO remuneration was unaffected by DRRR (Ferri and Maber, 2013). Since then, the UK government has elaborated a stricter set of rules, which have come into force in October 2013 and will apply to the Annual General Meetings (AGMs) of listed companies as of 2014 and early 2015. Among other things, the new rules require companies to submit their remuneration policies to a binding vote by the annual shareholder meeting every three years and to submit an ‘implementation report’ every year.
These regulatory changes provide a unique opportunity to study the impact of a binding ‘say on pay’ on managerial remuneration. The regulatory change can be treated as a natural experiment that will allow us to test causal theories based on AGM voting data. Given the theoretical importance of say on pay for CG theory and the topicality of the issue, the topic would generate interest among academics as well as outside academia.
The project aims to collect data on AGM voting- data for the FTSE 250 companies over the period 2003 to 2015. From 2003 it is possible to obtain data on ‘dissent rates’ on remuneration reports (percentage of votes for, percentage against, and percentage of abstentions). The 2014 and 2015 AGMs will be under the new rules on ‘say on pay’. The allows us to analyse the AGM voting behavior and impact on pay before and after the binding vote was in place.
Data on dissent rates on other resolutions submitted to the AGM as well as additional variables including the pay levels and ownership structure of the firms will also be collected. We also aim to conduct textual analysis of the arguments by directors to justify high levels of dissent in the previous year as UK companies are expected to explain their pay policy if there is a dissent of 20% or more. The response strategies of high dissent by top management teams will be a novel contribution to the say one pay literature.