Can management-sponsored non-binding remuneration votes shape the executive compensation structure? Evidence from Say-on-Pay votes in Germany

ABSTRACT

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.

KEYWORDS:

• Say-on-Pay
• remuneration vote
• entrenchment
• shareholder activism
• executive compensation

JEL CLASSIFICATIONS:

• G34
• G38
• M48
• M52

Acknowledgements

I would like to thank Patrick Velte (Leuphana University Lüneburg) and Ansgar Richter (University of Surrey) for their helpful comments. I also thank the participants of the European Accounting Association Conference 2016 and the International Conference on Reporting, Investor Relations and Capital Markets 2016.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Different measurements are discussed in the robustness section.

2 Changes in the estimator are demonstrated in the robustness section.

3 Please note that the conditioning of a fixed-effects logistic estimator in the given sample requires that firms have at least one vote to contribute to the sample. Firms with no votes consequently do not contribute. Eliminating these observations could systematically bias the sample because the reason for not scheduling an SOP is unknown.

4 This subsample of 42 CEO turnovers after an SOP vote is also used to test for the effect of high voting dissent on CEO turnover. The results were not significant and hence contrasted with other articles, such as Alissa (2015).

Additional information

Notes on contributors

Jörn Obermann

Jörn Obermann is assistant researcher and PhD student at the Leuphana University Lüneburg, Institute of Finance and Accounting. He is holding a Master of Arts in Accounting and Finance and a Master in Research Methods in Management.