In recent years Say on Pay has become a corporate governance and responsible investment buzzword and has been at the forefront of discussions around executive remuneration. 

At the same time, a growing number of countries are enacting legislation that is designed to give shareholders in public companies a mandatory vote on the compensation top executives receive. The UK has been the flag bearer, legislating on the issue as early as 2002. The 2007-08 global financial crisis crystallised more widespread interest from legislators, investors and the media, developing shareholder concerns about executive remuneration and performance.

We have brought together three papers that examine the issue in depth. The first provides an overview of the status of Say on Pay worldwide. This provides a good basis from which to examine two other papers, one on legislative changes in the UK, asking whether amendments reflect a case of form over substance, and in the case of the final paper, a focused examination of the impact of shareholder scrutiny in the US on executive compensation.

What is Say on Pay?

“A recurring, mandatory, binding or advisory shareholders’ vote, provided by law that directly or indirectly through the approval of the remuneration system, remuneration support or remuneration policy, governs the individual or collective global remuneration package of executives or managing directors of the corporation.”

Randall S. Thomas and Christoph Van der Elst

Why is it perceived as necessary?

The authors argue that it has long been a shareholder complaint that senior executives are overpaid, irrespective of their performance. Historically, investors have been largely powerless to act, but measures are increasingly being sought to gain greater influence over directors’ compensation decisions. One way that has gained increasing traction is Say on Pay.

Institutional context

In countries where corporate ownership is dispersed (typically, Australia, the UK and US), supporters of Say on Pay argue that shareholders are well placed to monitor management and so reduce the agency costs of the separation of ownership and control in public companies. The line of argument continues that institutional investors will overcome problems associated with collective action, more fully assess corporate performance and evaluate proposed pay packages. In turn, the idea is that boards respond better through their engagement with investors, and are more mindful of showing restraint in the compensation it awards top executives.

In the case of countries where ownership is concentrated (such as Belgium, Germany, the Netherlands and Sweden), the situation is more nuanced. There is already close monitoring of executive pay levels thanks to the presence of controlling shareholders.

The authors argue the need for Say on Pay in this scenario arises from changes including:

  • increased ownership dispersion at larger public companies creating a need for a new monitor of executive pay;
  • strong support of such legislation by foreign institutional investors whose ownership interests in EU-based firms has increased dramatically in recent years;
  • social pressures against rising levels of income inequality;
  • political responses by left-leaning parties to these social pressures by the introduction of Say on Pay legislation;
  • the presence of important state-owned enterprises in some of these countries that give politicians an important role in setting executive pay.

Impact of Say on Pay

Thomas and Van der Elst point out that these impacts vary considerably reflecting each country’s different business culture, but broadly, there are five general conclusions about the impact of Say on Pay, namely:

  1. Where Say on Pay votes are held, shareholders typically support pay levels and policies by very wide margins.
  2. The recommendations of third-party voting advisors carry a lot of weight and can dramatically impact the vote’s outcome.
  3. Say on Pay’s strongest effect has been on companies showing poor performance but with relatively high levels of pay.
  4. In instances where companies receive low levels of voter support, directors often contact investors to better explain their policies, which in turn gives shareholders greater input on pay issues.
  5. Finally, Say on Pay appears to have little long-term impact on executive pay levels.

Taking the 2011 proxy season in the US as their research material, the authors identified several clear trends. They discovered that shareholders showed strong support for existing pay practices at most firms. In the case of just 1.6% of times, management proposals were voted down. Shareholder votes correlated strongly with company share returns and CEO pay. Finally, where third-party advisors made negative Say on Pay recommendations, many companies modified their disclosure filings or changed their pay practices, sometimes retroactively, in an attempt to secure investor support.

Finally, where third-party advisors made negative Say on Pay recommendations, many companies modified their disclosure filings or changed their pay practices,  sometimes retroactively, in an attempt to secure investor support

Pros and cons

Proponents of Say on Pay argue that the legislation has an impact on shareholder value, pointing to figures suggesting if Say on Pay proposals receive more than 50% shareholder approval, the company experiences an abnormal return of 2.4% relative to those where such a vote fails.

It is also argued that Say on Pay both monitors and incentivises CEOs to deliver better performance through the provision of a clear mechanism for shareholders to voice their opinions.

Alongside this, a case can be made that Say on Pay has focused management more clearly on the concerns of shareholders, increased shareholder participation in corporate governance, and opened lines of communication between management and shareholders over the key issue of executive compensation.


The report highlights several key differences between the Say on Pay model in these countries. The first issue relates to the composition of companies and existing regulation of the board, which changes across countries and regions. Timelines can also be different; in the UK, shareholders vote on past remuneration schemes while in Sweden they consider the future of corporate pay. In the US, voters set the individual compensation package for directors, while in Sweden they advise on remuneration policy. In most countries, the way the shareholders vote serves to advise the board of directors in its development of appropriate incentivising schemes for executive directors, but in some remuneration policy is bindingly set at the AGM. There are also differences on whether it is individual or group pay over which shareholders has a say. Finally, timeframes are different, ranging from annual consideration of pay, to once every three years (the US) and longer (the Netherlands).

As a result, these differences complicate the choices that policy makers face, both in individual countries but more collectively. Thomas and Van der Elst use the example of attempts that have been made to develop a Europe-wide Say on Pay regime.

Yet still, these issues aside, Say on Pay is being adopted. Part of this must reflect the impact of the global financial crisis, following which investors have become more critical of high executive pay packages at firms that are not performing well. In this respect, Say on Pay provides investors with a means by which they can draw attention to pay-related concerns.

Thomas and Van der Elst argue that the institutionalisation of stock ownership is also having a significant impact. Many of these investors are either legally bound or want to actively use their voice in the investee companies. They expect that as foreign share ownership levels rise so will calls for Say on Pay voting.


There is some debate among the three papers over the outlook for Say on Pay. Initial research appears to suggest that it has had little or no impact on executive compensation levels. Research is however now making different or more focused comparisons and turning up some interesting results.

The authors cite research showing that across 39 sample countries, Say on Pay legislation is associated with lower levels of CEO remuneration. Furthermore, the study suggests that the companies that are most affected are those performing poorly. The study also finds that where Say on Pay has been introduced there are lower internal pay inequalities within firms as well as a higher value for the firm itself. The authors argue that most senior corporate figures prefer this ‘internal’ corporate solution to the possibility of direct regulation in the sector.

On the back of this, Thomas and Van der Elst suggest that it is plausible that policy moves will be made “to implement binding shareholder votes in Say on Pay legal regimes”.

The conclusions of the second paper, Does Shareholder Scrutiny Affect Executive Compensation?, by Mathias Kronlund and Shastri Sandy, suggest that the results of Say on Pay are more ambiguous.

The authors contend that while it is possible that added shareholder scrutiny may make compensation practices more efficient, this heightened scrutiny may result in less efficient compensation practices. The examples that the authors give are the use of ‘one-size-fits-all’ pay practices, which fail to consider each firm’s unique circumstances. Kronlund and Sandy also suggest that heightened shareholder scrutiny may prompt firms to improve the ‘optics’ of pay (i.e., packages that look better to shareholders), but are in fact less efficient. Additionally, they argue that in instances where firms already engage in poor pay practices (including over-payment) increased scrutiny may exacerbate the problem as the firm attempts to mask its procedures.

As a result, this paper has a different focus. It doesn’t seek to examine the overall effect of Say on Pay, but instead its authors have measured within-firm differences of pay across years among firms that have non-annual voting. By doing so, the report aims to answer the question of whether intensified shareholder scrutiny matters for pay. The authors argue that it is far more revealing to consider how an executive is paid in years when a vote is expected against those years where there is no vote.

The results of this research reveal that when firms face greater scrutiny they make changes to their executive pay packages. Typically, salaries are lower, but equity compensation is higher. Alongside this, the report suggests that firms make greater use of pensions (an area that typically receives less shareholder scrutiny) in years where there is a vote. During these periods, they also reduce or eliminate compensation practices, such as golden parachutes, which activist investors are likely to oppose. Consequently, in years where there is greater scrutiny, the report suggests that the net income of senior executives is likely to be higher because equity compensation has been raised.

When firms face greater scrutiny they make changes to their executive pay packages.

In systems (notably the US) where Say on Pay voting isn’t annual, Kronlund and Sandy suggest that Say on Pay is enabling firms to strategically shift pay across years to ensure that executives are compensated in the same way as before the legislation came into effect. Although Say on Pay rules in the U.S were designed not to place too much burden or cost on firms, the report argues that this needs to be weighed against the cost of enabling firms’ strategic behaviour, which may be distorting pay. Overall, the authors conclude that scrutiny matters and has a predictable influence on remuneration packages at the executive level.

Overall, the authors conclude that scrutiny matters and has a predictable influence on remuneration packages at the executive level.

This theme of firms seeking to distort pay while still seeming to abide by the Say on Pay rules is at the heart of the final paper, Form Over Substance? An Investigation of Recent Remuneration Disclosure Changes in the UK. Authors Aditi Gupta, Jenny Chu and Xing Ge consider new regulations that came into the force in the UK in 2013. These were designed to: “Restore a stronger, clearer link between pay and performance, reduce rewards for failure, and promote better engagement between companies and shareholders.” This paper argues however that they are not as effective as regulators had envisaged.

The paper samples FTSE 100 companies from 2011-2013 to first describe voluntary and mandated disclosure requirements. From this, the authors conclude that where companies voluntarily disclosed executive compensation they focused on presentation over substantive changes, reporting information in a new format rather than providing new content. In doing so, this report mirrors Kronlund and Sandy’s assertion about companies’ use of ‘optics’.

In cases of mandatory disclosure, Gupta, Chu and Ge discovered that this was subject to management discretion because firms could self-select their employee comparator groups.

Furthermore, following the introduction of the new legislation, the authors could find no stronger link between CEO pay and the firm’s performance nor any attempts to curtail the degree to which CEO pay was in excess of the firm’s average salaries. This is important because one of the key changes that the regulations introduced was the requirement for firms to disclose the percentage change in pay for CEOs and employees. The report reveals that not all employees were included in comparisons. Furthermore, figures show that although CEO cash pay was not growing out of line of workers’ salaries, CEOs enjoyed an increase in benefits of almost six times that of employees. The comparisons did not include equity-linked pay (a large component of executive pay), prompting the authors to suggest that reported figures for CEOs “are likely to be biased downwards”.

Alongside this, the paper reveals that during the period under review not only was there no improvement in the change in total shareholder returns and change in the face of new regulation, but that firms that had higher prior advisory dissent votes on pay continued to give out high executive remuneration. Taken together, the authors conclude that it is questionable whether the UK’s new enhanced disclosure regime has been effective.

The authors caveat that the sample size for their research was small and that they based their assessment on the first year that the regulations came into force. They conclude however, that even following the introduction of regulations, pay-performance asymmetries remain.

The PRI encourages active ownership, and suggests that shareholders get informed and get involved in countries where they have an opportunity to vote on pay. We welcome the required vote on remuneration policy and remuneration report (PRI policy briefing: EU Shareholder Rights Directive 2016). As we have seen from these three papers, there is still room for improvement. Until this happens, these types of regulations cannot be used to their full potential, creating a situation whereby shareholders continue to have concerns over executive remuneration that aren’t being fully addressed. Positively, legislators are taking notice and taking action, more countries are mandating Say on Pay, researchers are highlighting some of the deficiencies of the existing systems, and institutional investors are getting involved, bringing a strong voice to the debate. With these pressures, and through research that is raising awareness of existing shortfalls, we hope that Say on Pay, already a powerful tool for investors, can be used to its full potential.

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    RI Quarterly vol. 11: Proxy season 2017

    June 2017