Say on Pay Votes and CEO Compensation: Evidence from the UK*

In this study, we examine the effect on CEO pay of new legislation introduced in the United Kingdom (UK) at the end of 2002 that requires publicly-traded firms to submit an executive remuneration report to a non-binding shareholder vote ("say on pay") at the annual general meeting. Based on a large sample of UK firms over the period from 2000 to 2005, we find no evidence of a change in the level and growth rate of CEO pay after the adoption of say on pay. However, we document an increase in the sensitivity of CEO cash and total compensation to negative operating performance, particularly in firms with excessive compensation in the "pre" period (2000-2002) and in firms with high voting dissent. To assess whether the results are driven, respectively, by other governance changes in the UK or global trends in the CEO labor market, we use a control sample of UK firms not subject to the new rule (within-country test) and a control sample of US firms (between- country test). These tests confirm the increase in sensitivity of CEO cash and (more weakly) total pay to negative operating performance. Our findings are consistent with widespread calls for less "rewards for failure" that led to the legislation's introduction and may be of interest to regulators and investors who are pondering the merits of a similar rule in the US and in other countries.