Abstract

This dissertation comprises three essays on issues related to Say-on-Pay, a governance measure which allows shareholders to vote on executive compensation. In the first essay adopting a window-dressing perspective, I examine whether the mandatory adoption of Say-on-Pay is associated with opportunistic non-GAAP reporting to mislead shareholders about firm’s performance and avoid shareholder dissatisfaction against executive compensation. The sample comprises U.S. Fortune 250 firms, from 2003 until 2017. Results show that managers increasingly disclose non-GAAP earnings and exclude recurring items after the mandatory adoption of Say-on-Pay regulation. Also, managers’ exclusion choice of recurring items and the likelihood of reporting non-GAAP metrics are more pronounced during years when the firm is subject to a vote. The findings shed some light on the unintended consequences of Say-on-Pay, especially when the ethical concerns about non-GAAP reporting are raised.

The second essay integrates agency and resource dependence theories to examine the influence of compensation committee members’ qualities and non-GAAP reporting on shareholders’ Say-on-Pay support. Compensation committee quality is an aggregate measure of compensation committee attributes that include the directors’ interdependencies, their tenure, holding a CEO position, the number of seats they hold, and committee size. Results suggest that high quality compensation committees influence shareholders to provide a support to their Say-on-Pay vote. Moreover, the quality of non-GAAP reporting is associated with shareholders’ votes. Shareholders do not appear to be misled by low-quality non-GAAP metrics and managers’ opportunistic motive. On the contrary, shareholders vote against executive compensation when these metrics are of low-quality. While policy makers have set the regulation to curb excessive executive pay through shareholders’ votes, this study reveals that factors other than the excess pay itself may influence shareholders’ perceptions.

The third essay synthesizes research on Say-on-Pay and classifies it into two categories that revolve around the determinants and consequences of Say-on-Pay. Based on the first and second essays of my dissertation, I build a conceptual model that represents two closed interconnections. The first connection is between Say-on-Pay and compensation committees.
Shareholders’ Say-on-Pay votes are more favorable when compensation committee quality is high. However, when shareholders vote against executive compensation in Say-on-Pay, they also vote against the re-election of compensation committee members. The second connection of the model is between Say-on-Pay and non-GAAP reporting. The introduction of Say-on-Pay motivates managers to opportunistically report non-GAAP metrics. However, when managers report low-quality non-GAAP metrics, shareholders’ Say-on-Pay votes become more negative. Thus, it appears that Say-on-Pay holds simultaneously a dual role as both a determinant and a consequence in its relation to compensation committee and non-GAAP reporting.

Keywords: Say-on-Pay; Executive compensation; Non-GAAP earnings; Compensation committee quality; Interdependent directors; Director tenure; CEO directors; Director shareholdings; Additional directorships; Committee size.