Say-on-Pay and the Differential Effects of Voluntary Versus Mandatory Regimes on Investor Perceptions and Behavior

Say-on-pay is a corporate governance mechanism through which investors cast a non-binding vote on executive compensation. Using an interactive-laboratory experiment, we examine the influence of say-on-pay on investors' perceptions of procedural fairness, their trust in boards of directors, and their willingness to invest in firms. We consider the effects of say-on-pay both when firms invite say-on-pay voluntarily — which is analogous to the former governance regime — and also when say-on-pay is mandated by law, as recently enacted by the United States Congress. We provide evidence that giving investors a voice in setting executive compensation (i.e., permitting say-on-pay) improves investors' perceptions of the fairness of compensation-setting procedures, which leads to greater investor trust in boards of directors and increases their willingness to invest. However, we find that say-on-pay's positive effect on investor behavior is greater when boards give their investors a voice voluntarily than when they are mandated to do so. Further, we find that investors react negatively when directors' compensation decisions do not conform to investors' expressed say-on-pay preference