It's OK to pay well, if you write well: The effects of remuneration disclosure readability

Abstract

We examine whether, and how, shareholders’ votes in the Say‐on‐Pay (SOP) are affected by the readability of the Compensation Discussion and Analysis (CD&A). Despite the SEC's Plain English requirement, qualitative disclosures on executive remuneration are generally long and complex. Extant evidence on whether low readability results in higher or lower shareholder dissent in the SOP, however, is ambiguous. We resolve this debate by demonstrating that the effects of readability on SOP voting are heterogeneous; while obfuscation may reduce dissent when CEO compensation is close to “normal” levels, diminished readability results in increased scepticism when pay levels are clearly excessive. The moderating role of readability is most pronounced for firms with less sophisticated shareholders, consistent with readability acting as a heuristic cue. Our results are robust to propensity score matching, and are less pronounced (1) when shareholders have less time to review the CD&A, and (2) when shareholders are distracted by competing AGMs, suggesting they are driven by readability, directly. Overall, our results highlight that greater use of Plain English in remuneration disclosures can have a substantial persuasive impact on shareholders.

Mind the gap: CEO–employee pay ratios and shareholder say‐on‐pay votes

“…Furthermore, Hooghiemstra, Flora Kuang, and Qin (2017) find that institutional investors exhibit higher dissenting SOP votes in the United Kingdom when remuneration reports are opaque, indicating that they pay careful attention to compensation‐related matters. Similarly, Hemmings, Hodgkinson, and Williams (2020) find that the readability of US compensation disclosures plays a larger moderating role on SOP votes the greater the fraction of non‐professional investors. Overall, the literature indicates that investors’ SOP responses to compensation information varies across investor type.…”

The roles of XBRL and processed XBRL in 10‐K readability

“…LM's (2014) model relates readability to return volatility after the filing of 10-K, which echoes the general belief that low readability fuels skepticism while readable reports reduce uncertainty (e.g., Hemmings et al, 2020;Hsieh et al, 2016). As such, RMSE is an inverse measure of readability.…”

The fog index in accounting research: contributions and challenges

“…Journal of Accounting and Public Policy (Balsam et al, 2016;Blanco et al, 2020;Bozanic et al, 2017;Ettredge et al, 2018;Hossain et al, 2020;Kuang et al, 2020;Laksmana et al, 2012;Lim et al, 2018;Lobo et al, 2019;Melloni et al, 2017;Nguyen and Kimura, 2020;Twedt and Rees, 2012) 12 13 Journal of Business Finance and Accounting (Hemmings et al, 2020;Zhang et al, 2019;Chen et al, 2020;Hsieh et al, 2016;Li, 2019;El-Haj et al, 2019;Chen, 2016…”

“…The fog index measures readability as a function of (a) the number of words per sentence and (b) the percentage of words identified as "complex". Complex words consist of three or more syllables (Hemmings et al, 2020;Li, 2008). Based on the principle that all things being equal, longer words and longer sentences make a document more difficult to read (Loughran and McDonald, 2016).…”