Larcker et al. on Economic Consequences of Proxy Advisor's Say on Pay Policies

The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies, by David F. Larcker, Stanford University - Graduate School of Business; Allan L. McCall, Stanford University - Graduate School of Business; and Gaizka Ormazabal, IESE Business School of the University of Navarra, was recently posted on SSRN.  Here is the abstract:

This paper examines changes in executive compensation programs made by firms in response to proxy advisory firm say-on-pay voting policies. Using proprietary models, proxy advisory firms, primarily Institutional Shareholder Services and Glass, Lewis & Co., provide institutional shareholders with a “for” (positive) or “against” (negative) recommendation on the required management say-on-pay proposal in the annual proxy statement.

Analyzing a large sample of firms from the Russell 3000 that are subject to the initial say-on-pay vote mandated by the Dodd-Frank Act, we find three important results.

First, proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes. Second, a significant number of firms change their compensation programs in the time period before the formal shareholder vote in a manner consistent with the features known to be favored by proxy advisory firms apparently in an effort to avoid a negative recommendation. Third, the stock market reaction to these compensation program changes is statistically negative.

Thus, the proprietary models used by proxy advisory firms for say-on-pay recommendations appear to induce boards of directors to make choices that decrease shareholder value.