Say on pay votes, subsequent firm performance, and CEO risk‐taking behavior

• Published date: 01 October 2022
• Author: Ayishat Omar,Huey‐Lian Sun,Alex P. Tang
• Date: 01 October 2022
• DOI: http://doi.org/10.1002/jcaf.22559

Received:  March  Accepted:  April 

DOI: ./jcaf.

RESEARCH ARTICLE

Say on pay votes, subsequent firm performance, and CEO

risk-taking behavior

Ayishat Omar1Huey-Lian Sun2Alex P. Tang2

Department of Accounting and Finance,

Rohrer College of Business, Rowan

University, Glassboro, New Jersey, USA

Department of Accounting and Finance,

Earl G. Graves School of Business,

Morgan State University, Baltimore,

Maryland, USA

Correspondence

Ayishat Omar,Department of Accounting

and Finance, Rohrer College of Business,

Rowan University,Glassboro, NJ ,

USA.

Email: omar@rowan.edu

Abstract

Say-on-pay empowers shareholders by mandating advisory voting on execu-

tive compensation during annual meetings. Extant literature maintains that the

degree of effectiveness of SOP remains unclear. Using shareholder voting data

from  to , we estimate regression models, and fromour analysis, we f ind

improved subsequent firm performance for higher SOP voting dissent observa-

tions. Furthermore, we find a positive association between SOP dissent vote and

risk-taking. The findings suggest that managers take seriously the negative out-

comes of SOP,especially the higher SOP voting dissent. This study contributes to

the growing research on SOP votes, as it highlights some impact of SOP voting.

KEYWORDS

CEO risk-taking, executive compensation, firm performance, say on pay, shareholdervotes

1 INTRODUCTION

The purpose of this study is to examine the association

between say on pay (SOP) dissent votes, changes in firm

performance, and CEO risk-taking behavior.SOP is a term

that describes the process where shareholders have the

ability to influence corporate policy (SEC, ). Amongst

other things, SOP requires that at least once every three

years, public companies provide their shareholders a non-

binding vote on the pay packages of their most highly paid

executives (SEC, ).

Though shareholders have been voting to overwhelm-

ingly approve management pay packages (Semler-Brossy,

), some firms have been making headlines because

their shareholders have been voting repeatedly to disap-

prove executive compensation proposals. According to a

Wall Street Journal report of , some firms, such as

TCF Financial Corp., Tutor Perini Corp., Oracle Corp.,

and Spectrum Pharmaceuticals, have been getting nega-

tive media coverage because they have been receiving high

SOP dissent votes (Lublin, ). These firms have received

multiple defeats and are facing shareholder outcries over

pay issues. Critics argue that firms with such high share-

holder dissent typically exhibit a disconnect between firm

performance and compensation (Lublin, ).

Dissent is greater in poor performing firms and in firms

where CEO compensation is high (Ertimur et al., ;

Kimbro & Xu, ). Critics of executive paycomplain that

executives are being handed generous pay, even when firm

performance is underwhelming (Gray & Foley, ). With

shareholder revolts making headlines, there is increased

pressure on CEOs to perform, especially when their pay is

high (Gray & Foley, ).

Although the number of firm-year observations with

high shareholder dissent is generally low, the Dodd-Frank

provision on SOP makes apparent the pressure on execu-

tives to improve firm performance when compensation is

high (Cotter et al., ). Shareholder dissent can threaten

thejobofCEOs(Alissa,; Stathopoulos & Voulgaris,

) and lead to changes in the structure of their pay

(Burns & Minnick, ). Variability in pay and employ-

ment risk induce CEO risk-taking (Larraza-Kintana et al.,

).

Furthermore, John et al. () document that investor

protection mechanisms impact managerial risk choices

in corporate investment decisions. Thus far, it remains

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