An investigation of corporate directors' responses to CEO pay ratio disclosures and say‐on‐pay votes

Abstract

The purpose of this study is to shed light on the effects of the CEO pay ratio and say‐on‐pay votes on directors' concerns about CEO pay equity. Investigation of the pay ratio disclosure rule offers opportunities to gain insights into whether equity perceptions associated with mandated pay ratio disclosure have significant effects on remuneration decisions in organizations. We conduct an online experiment with practicing corporate directors to examine the effects of CEO pay ratio disclosures and say‐on‐pay (SOP) votes on director decisions. Results indicate that CEO pay ratio disclosures significantly influence directors' decisions regarding executive compensation, leading directors to be less willing to increase CEO pay when the pay ratio is above the industry average pay ratio. Results also demonstrate that say‐on‐pay votes only influence directors' compensation decisions when the CEO pay ratio is above the industry average. Directors in firms with pay ratios that are above the industry average are less willing to increase CEO pay when they anticipate shareholder votes against a CEO pay increase than when they anticipate positive SOP voting outcomes. Directors in firms with CEO pay ratios that are below the industry average, however, are willing to increase CEO pay regardless of SOP voting outcomes.

The moderating effects of CEO power and personal traits on say‐on‐pay effectiveness: Insights from the Anglo‐Saxon economies

“…The second is the investigation of the moderating effects of the various corporate governance mechanisms on the efficacy of say‐on‐pay, through the lens of power distribution. While the prior empirical literature (e.g., Crawford et al, 2020; Norman et al, 2020) has considered the direct impact of certain corporate governance mechanisms on CEO pay, the moderating effect of such mechanisms on SOP were missing (see Section 2.3). Another major departure of the current study is to investigate the impact of CEO personal characteristics on pay ratio as well as their moderating effects on the potency of say‐on‐pay.…”

“…In contrast, a study of Mohan and Ruggiero (2007) shows that gender plays a role in the level of CEO pay and women are under‐compensated. However, prior empirical studies have failed to take account of the moderating effect of gender in the context of SOP votes (e.g., Bao et al, 2020; Boone et al, 2020; Crawford et al, 2020; Ibrahim et al, 2021 and Norman et al, 2020). Thus, the following hypothesis is designedHypothesis The presence of a female CEO increases the effectiveness of SOP in curtailing pay ratio .…”