Portfolio Incentives and Say-on-Pay

Responding to the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) to “provide for financial regulatory reform” and to “protect consumers and investors[.]” Section 951 of the Dodd-Frank Act (“Section 951”) requires publicly-traded companies to hold non-binding shareholder votes on executive compensation. These non-binding votes are often called “Say-on-Pay” votes.This paper presents original empirical research suggesting that shareholders and proxy advisors fail to consider portfolio incentives when making Say-on-Pay decisions. It then argues that when deciding how to vote in Say-on-Pay, shareholders should consider portfolio incentives, which economists regard as the most important measure of pay-for-performance. Similarly, it also argues that proxy advisors – who advise shareholders how to vote on various matters, including Say-on-Pay – should also consider portfolio incentives when issuing their recommendations. This paper further argues that, to make it easier for shareholders and proxy advisors to consider portfolio incentives, regulators should require improved disclosure of executives' stock ownership