Director reputational penalties when shareholders disapprove of executive compensation

• Published in: The Journal of financial research 2022-12, Vol.45 (4), p.759-795
• Main Authors: Badgett, Mary Elizabeth, Brunarski, Kelly R., Colin Campbell, T., Harman, Yvette S.
• Format: Article
• Language: English
• ISSN: 0270-2592; 1475-6803
• DOI: 10.1111/jfir.12295

We investigate the reputational consequences for directors of firms that receive a low‐support Say‐on‐Pay (SOP) vote. These affected directors face a significantly greater likelihood of losing board seats, both at the voting firm and in the external labor market. However, penalties are not equal for all directors. Directors who serve on compensation committees and at firms with high chief executive officer pay suffer internal penalties. Both internal and external penalties affect directors of low‐support firms with high executive entrenchment. Compensation committee members serving low‐support firms are more likely to receive a negative reelection recommendation from Institutional Shareholder Services and fewer votes for reelection, at both voting and external firms. We provide the first evidence of external labor market penalties when directors fail to align executive compensation contracting with shareholder preferences. Our findings suggest that nonbinding SOP votes provide shareholders with a mechanism to influence director incentives and, therefore, executive compensation.