The Effect of Shareholder Proposals on Executive Compensation

We examine the various methods by which shareholders have tried to influence executive compensation. We then attempt to determine whether one of the most popular methods for individual investors, shareholder proposals using Rule 14a-8, has had any impact on the level and composition of CEO's compensation at target companies. We use data for the 1993-1997 proxy seasons on 168 executive compensation proposals submitted to 145 different companies to determine how shareholders have chosen their target companies and whether these companies' boards have responded to investors' proposals by reducing CEO pay levels or shifting the composition of their pay packages. Our analysis yields several interesting results. We find that shareholders generally target their proposals at relatively poorly performing companies exhibiting higher levels of executive compensation than other similar-sized firms in their industry. This is consistent with the claim that shareholder proposals are being used in an attempt to monitor excessive levels of executive compensation. We also find that shareholders are statistically more likely to support executive compensation proposals that attempt to restrict executive compensation than they are proposals that simply ask for more disclosure about executive compensation. Similarly, we find that shareholders are statistically more likely to support executive compensation proposals that raise corporate governance issues rather than those that raise social responsibility issues. Shareholder proposals concerning executive compensation may affect the level and composition of CEO compensation. We find that target companies do not increase average total CEO compensation levels as rapidly in the year after receiving a shareholder proposal as firms not receiving such proposals. In addition, we employ regression analysis to determine whether executive compensation levels at companies receiving shareholder proposals are affected by factors such as the level of voting support for the initiative, the type of sponsor of the proposal, and the nature of the proposal related to the proposal. We find some support for the hypothesis that higher levels of voting support for proposals are associated with smaller increases in CEO compensation at companies receiving proposals when compared to CEO pay levels at similar-sized companies in the same industry. These results are consistent with the hypothesis that boards of directors are responsive to shareholders' expressions of dissatisfaction with their firms' executive compensation pay packages, especially when they are raised as corporate governance issues.