Say On Pay Analysis

Ertimur, Yonca, Ferri, and Oesch investigate the economic role of proxy advisors in the context of “Say on Pay” votes and seek to answer the question, “Do proxy advisors mostly act as information intermediaries by gathering and processing information for institutional investors who need to fulfill their fiduciary duties to vote, or do they also identify and promote superior governance practices?” The authors seek to answer this question by studying the method of “Say on Pay” analysis of the two most influential proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis & Co.
ISS organizes its analysis along five dimensions: pay for performance (a comparison of CEO’s pay over time vs. the overall performance of the company), peer group (a comparison of comparable companies and how they pay their executives), non-performance pay (bonus and incentive structure), severance (severance and change-in-control arrangements) and communication (compensation committee’s responsiveness to shareholders). ISS concludes the analysis of each dimension with an overall ranking: High, Medium or Low level of concern.
Glass Lewis structures its analysis in a similar manner and focuses it along three dimensions: pay for performance (ranked on a grade scale from A-F with F
On average, only an “Against” recommendation for Say on Pay is statistically significant. When a proxy advisor releases an “Against” recommendation, the market reacts significantly negative. An explanation is that “Against” recommendations by proxy advisors help investors identify companies with low quality compensation practices. After an “Against” vote is recommended by the proxy advisor, the authors find that more than half of all firms issue changes to their executive pay in response to proxy advisors. However, there are no significant stock price changes after a change in executive pay is