Faculty of law blogs / UNIVERSITY OF OXFORD

Say on Pay: Do Shareholders Care?


Carsten Gerner-Beuerle
Tom Kirchmaier


Time to read

4 Minutes

In our paper, we examine the impact of the enhanced executive remuneration disclosure rules introduced in the UK in 2013 on the voting behavior of shareholders. The new UK regime requires issuers to divide the annual pay disclosures into two parts and grants shareholders separate votes on each part. The two parts of the remuneration report have to contain distinct sets of information regarding actual pay for the past financial year (contained in the annual report on remuneration) and a description of the structure of future pay awards (remuneration policy). The detailed information that must be disclosed is laid down in a statutory instrument.[1] Some of it has to be provided as numerical information, such as information on past executive pay or the length of vesting and holding periods, and some in the form of a narrative, such as information on termination payments or the circumstances when malus and clawback apply. By providing for two votes, the policy maker sought to enable shareholders to discriminate between the two sets of disclosures and penalize excessively high remuneration packages with the first (advisory) vote and badly structured compensation packages – for example because they do not rein in reward for failure – with the second (binding) vote.

We are interested in understanding whether this policy goal has been achieved, and more specifically, which items of disclosure guide shareholder voting. We hypothesize that the approval rate in a vote on the annual report on remuneration is correlated with variables capturing information contained in that part of the remuneration report, in particular the amount of remuneration received by executives in the past financial year, and the approval rate in a vote on the remuneration policy with variables capturing the structure of future pay.

Our main findings are twofold. First, shareholders do differentiate in their voting behavior according to the purpose of the two votes they have under the new regulations. The vote on the annual remuneration report is used to penalize perceived deficiencies in the current remuneration package of a CEO, whereas the vote on the policy report is used to express concerns that shareholders have with regard to future remuneration. Furthermore, we find some – tentative – evidence that the introduction of a binding vote on executive pay has resulted in lower levels of executive remuneration.

However, our findings also show that lower approval rates are largely driven by headline remuneration figures and easily understandable proxies for pay quality. In the case of the annual remuneration report, the key explanatory variable is – unsurprisingly – the total remuneration received by a CEO. In the case of the policy report, the most important explanatory factor is the maximum remuneration opportunity of a CEO under the proposed remuneration policy, which has to be depicted in bar charts indicating the level of remuneration that will be received if the relevant performance targets are met or exceeded. This result is noteworthy, because the bar charts have limited informational value. The regulations grant companies discretion in how to calculate the remuneration opportunity, provided the basis of the calculation and the assumptions are disclosed, and the adequacy of the compensation package can only be assessed properly if the amount of remuneration is seen in relation to the performance targets used by the company and the likelihood that these targets will be achieved. The overall remuneration opportunity as such, therefore, is not a good indicator of a well-designed remuneration policy that aligns the interests of shareholders and managers effectively (although it is a reasonably good predictor of the amount of pay that a CEO can be expected to receive in the future).

We would expect structural features such as long vesting periods, a stringent approach to payments for loss of office or other mechanisms that avoid reward for failure, to be of primary concern to shareholders when they vote on a company’s remuneration policy, but we find no evidence that this is the case. A reason of the focus of shareholders on a CEO’s maximum remuneration opportunity may be that it is presented graphically in the form of a bar chart. Hence, the information is easily accessible and can be processed quickly, whereas other information, for example the description of a company’s policy on termination payments, requires higher processing costs and, to a certain degree, interpretation. The same holds for other significant predictors of voting outcomes in our models, namely the length of the policy report and the assessment of a company’s pay policy by proxy advisors, which is expressed as a letter grade. In both cases, the predictors are readily available proxies that do not create material processing costs on the part of shareholders.

We are mindful of the limitations of our findings. In many cases, management engages with institutional investors in informal discussions about the design of executive pay packages. The absence of a significant association between most of the structural features of executive pay and voting outcomes may be a function of shareholder concerns being addressed before a vote takes place. Likewise, some of the information disclosed pursuant to the UK regulations is conveyed to shareholders in the condensed form of a proxy advisor’s assessment and is absorbed by the market accordingly. However, in the former case extensive disclosures would not be necessary, and in the latter it remains doubtful whether all of the information that has to be disclosed pursuant to the new regulations, which were drafted with a view to empowering institutional and retail investors, is relevant to proxy firms, whether it is transmitted to shareholders without loss of information, and shareholders make use of the proxy firms’ signal effectively. Further research is required to investigate these questions. In any case, focusing on shareholder voting behavior, our findings call into question whether the extended disclosure requirements introduced by the 2013 UK pay reforms fully achieve the regulatory goals they pursue and do not impose inefficiently high reporting costs on companies.

Carsten Gerner-Beuerle is Professor of Commercial Law at the Faculty of Laws, University College London

Tom Kirchmaier is Professor of Governance, Risk, Regulation and Compliance at the Centre for Corporate Governance, Copenhagen Business School


[1] The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, Statutory Instrument 2008 No. 410, Schedule 8, as amended by the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations, Statutory Instrument 2013 No. 1981.


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