TY - JOUR

T1 - Can management-sponsored non-binding remuneration votes shape the executive compensation structure?

T2 - Evidence from Say-on-Pay votes in Germany

AU - Obermann, Jörn

PY - 2018/11/22

Y1 - 2018/11/22

N2 - In this paper, a hand-selected sample of 1676 annual general meetings with 268 management-sponsored Say-on-Pay votes in 164 different companies between 2010 and 2015 in the German two-tier system was analysed. The analysis focused on the structure, rather than the level, of executive compensation by applying a sample-selection model and panel data regression. Consistent with our hypotheses, shareholders favour long-term stock and stock option plans but oppose short-term cash-bonus payments. However, the positive effect of equity compensation decreases as the share of the total remuneration increases, suggesting that the alignment effect is limited. The negative effect of bonus payments on the voting results is stronger in cases in which the voting approval of the supervisory board is low. Thus, investors who are discontent with the bonus payments eventually punish the supervisory board in charge of negotiating the contract. The supervisory board reacts to such cases by reducing the bonuses and increasing the equity payments in the following year, but the total compensation or fixed annual salary is unaffected. Hence, Say-on-Pay in Germany affects the structure but not the level of compensation. The results show that shareholders assess the entire compensation structure and prefer a particular compensation mix. However, non-binding Say-on-Pay votes help to establish compensation schemes that are favoured by shareholders.

AB - In this paper, a hand-selected sample of 1676 annual general meetings with 268 management-sponsored Say-on-Pay votes in 164 different companies between 2010 and 2015 in the German two-tier system was analysed. The analysis focused on the structure, rather than the level, of executive compensation by applying a sample-selection model and panel data regression. Consistent with our hypotheses, shareholders favour long-term stock and stock option plans but oppose short-term cash-bonus payments. However, the positive effect of equity compensation decreases as the share of the total remuneration increases, suggesting that the alignment effect is limited. The negative effect of bonus payments on the voting results is stronger in cases in which the voting approval of the supervisory board is low. Thus, investors who are discontent with the bonus payments eventually punish the supervisory board in charge of negotiating the contract. The supervisory board reacts to such cases by reducing the bonuses and increasing the equity payments in the following year, but the total compensation or fixed annual salary is unaffected. Hence, Say-on-Pay in Germany affects the structure but not the level of compensation. The results show that shareholders assess the entire compensation structure and prefer a particular compensation mix. However, non-binding Say-on-Pay votes help to establish compensation schemes that are favoured by shareholders.

KW - Management studies

KW - entrenchment

KW - executive compensation

KW - remuneration vote

KW - Say-on-Pay

KW - shareholder activism

UR - http://www.scopus.com/inward/record.url?scp=85041103232&partnerID=8YFLogxK

U2 - 10.1080/1351847X.2017.1419982

DO - 10.1080/1351847X.2017.1419982

M3 - Journal articles

VL - 24

SP - 1609

EP - 1630

JO - European Journal of Finance

JF - European Journal of Finance

SN - 1351-847X

IS - 17

ER -