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Having Her Say
This article originally appeared in the Bentley Magazine.
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Professor puts a spotlight on executive pay
Democracies thrive on the belief that voice of the people matters. But Kristina Minnick wasn’t always convinced. In fact, when the assistant professor of finance started researching corporate “say on pay” proposals — which aim to give shareholders a voice in determining executives’ compensation — she believed quite the opposite.
“In all honesty,” she says, “I thought the proposals were just shareholders making noise.”
She wasn’t alone in her skepticism. Say on pay proposals tend to surface when investors are unhappy and want to rein in corporate governance. But since they allow shareholders only a non-binding, advisory vote in executive earnings, critics contend that the proposals stir the pot at companies unnecessarily, without really having any impact. Proponents, on the other hand, believe that simply putting the spotlight on compensation can effect change, even if the votes themselves do not.
Minnick set out to determine, once and for all, which camp is correct.
A Win for Shareholders
Executive compensation captured Minnick’s interest during her doctoral study at the University of Maryland. Accounting scandals at WorldCom, Enron, Tyco and other companies were making daily headlines.
“In all these major blowups, I wondered, ‘How did the CEOs’ compensation lead them down this path, where they’re looking at building up their own perks versus the wealth of shareholders?’” observes Minnick, who went on to study how government policies affect corporate decision-making, during a stint as a visiting scholar at the Federal Deposit Insurance Agency.
She joined the Bentley faculty in 2005 and began to see an even greater need for research in this area.
“These proposals are being pushed by the Obama administration, and their popularity has grown enormously. In 2006, there were only six say on pay proposals; in 2008, there were 79,” she says. “So the idea arose: Do they really matter?”
To find out, Minnick teamed up with Natasha Burns of the University of Texas at San Antonio. With the help of data culled by two of Minnick’s senior finance students, they studied every say on pay proposal submitted from 2006 to 2008. They also looked at executive compensation figures from the ExecuComp database.
Minnick was surprised by what they found: Proposals did not change the overall level of executives’ pay, but rather the type of compensation received.
“In companies that receive say on pay proposals, the CEO and other executives see a reduction in their bonus, but an increase in their incentive compensation,” she explains, noting that economic theory favors stock options and other incentives, so executives are more aligned to shareholder interests. “It’s a zero net change for the executives, but shareholders are better off.”
Moreover, the research team discovered that the very presence of say on pay proposals and the attendant focus on compensation are enough to prompt action. That is, a company typically makes changes – for example, adjusting stock options to compose a greater portion of executive wealth – soon after receiving the proposal, versus waiting for its official passage.
As the first paper resulting from their research awaits publication, Minnick is planning Phase 2: examining the impact of other types of shareholder proposals on corporate governance. All of the work informs her teaching.
“I use ideas from my research to ask questions about the future and encourage students to think about how to become more effective business leaders,” she says. “It’s an ethical approach for developing an explicit set of values, which students can use in moving forward with their careers.”
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