Say on Pay Also, Holding a Sop Vote Was a Mandatory Condition for Firms to Receive Funds under the Troubled Asset Relief Program (tarp). during the 2008 Campaign, Both Presidential Candidates

Consumer Protection Act (hereafter Dodd-Frank Act). 1 One provision of the Act mandates that, beginning with annual meeting on or after January 21, 2011, US publicly traded firms allow shareholders a nonbinding vote on executive pay, known as " say on pay " (hereafter SOP). 2 The purpose of this chapter is to present key insights from the academic research on the economic consequences of SOP. Before doing so, though, it is useful to put the SOP initiative into historical perspective. While CEO pay has made headlines and captured the attention of politicians and policy makers for many decades (Murphy 2012), it has arguably received even greater scrutiny over the last two decades. During the New Economy of the 1990s, the growing use of stock options as incentive tool (favored by a benign accounting treatment) led to a rapid increase in CEO pay, with the average CEO-to-worker pay ratio peaking at more than 400 in 2000, up from 18 in 1965 (Mishel and Sabadish, 2012). As the dot-com bubble began to burst and a series of accounting and governance scandals unfolded (e.g. Worldcom, Enron), stock options (and, thus, executive pay), were blamed for providing perverse incentives to manipulate financial reports and the stock price. At the same time, these governance scandals led many adding Section 14A (codified as amended at 15 U.S.C. §78n-1) (" Exchange Act Section 14A "). 2 Dodd-Frank Section 951 also mandates a non-binding vote on the frequency of future say on pay votes (known as say-when-on-pay vote), with a choice between an annual, a biennial or a triennial frequency. This vote on the frequency of future SOP votes must be held every six years. At most firms, shareholders overwhelmingly favored an annual frequency. For an analysis of determinants and consequences of say-when-on-pay votes, see Ferri and Oesch (2013). 3 institutional investors to take a more active role in monitoring corporations, spurring a wave of shareholder activism. A whole new industry of governance experts and intermediaries (governance ratings agencies, proxy advisors) emerged, while influential academic studies documented a large impact of governance quality on firm value (Gompers, Ishii and Metrick 2003; Bebchuk, Cohen and Ferrell, 2009). Calls for policy reforms empowering shareholders became louder and corporate governance took center stage in the policy debate. Like other institutional investors, union pension funds began to take a more active role too. Because union pension funds tend to be well …