Say-on-Pay and the Differential Effects of Voluntary versus Mandatory Regimes on Investor Perceptions and Behavior

What is it about?

Say-on-pay is a non-binding shareholder vote on executive compensation, held before the compensation is finalized by corporate boards of directors. Many jurisdictions mandate say-on-pay, but even in those that don't, many companies voluntarily invite their shareholders' voice in setting executive compensation.This variation in practice motivates the question of whether the degree to which the benefits of giving people a voice depends on whether voice is provided on a voluntary basis or is mandated by a third party.Our theory-driven model shows that investment is greatest when the company voluntarily allows investors to vote, rather than when it is mandated by a third party. We further find that investors trust directors less and invest less in the future when directors ultimately make compensation decisions that do not conform to investors' expressed preference.

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