Shareholder Influence on Executive Compensation

The CEO of Palantir Technologies, Alex Karp, recently made headlines as one of the highest paid chief executives of a publicly traded U.S. company. But Karp’s compensation was not solely in cash—the sizeable $6.8 billion figure refers to “compensation actually paid,” the annual increase in the value of an executive’s current and potential stock holdings. Like most chief executives, the majority of Karp’s compensation takes the form of stock, stock options, and other investment vehicles.

Executive compensation plans are typically incentive based, calculated from metrics such as the economic performance of the corporation. But the rise of environmental and social governance (ESG) shifted the priorities of corporate governance. For example, Apple CEO Tim Cook’s 2024 pay package was tied to his performance on ESG criteria, putting Apple at the forefront of a growing cohort of companies expanding their executive performance benchmarks to include non-economic metrics.

The United States is home to the world’s highest paid executives, and growth in executive compensation continues to outpace employee pay—in 2024, the median CEO to employee pay ratio among S&P 500 companies rose from 186:1 to 192:1. In other words, the average CEO at a large U.S. company makes nearly two hundred times the salary of an average U.S. employee, and this discrepancy, like overall income inequality, is rising.

Generally speaking, a company’s board of directors decides how much an executive gets paid, often with the advice of a compensation committee or outside compensation consultant. Shareholders can also propose or hold non-binding votes on executive compensation, often referred to as “say on pay.”  Since the passage of the Dodd-Frank Act in 2010, the U.S. Securities and Exchange Commission (SEC) rules require that shareholders hold an advisory vote on executive compensation that is separate from the directors’ vote, but this vote is advisory, meaning the board does not have to follow its outcome.

The most common mechanism used by shareholders to influence executive compensation is the so-called say-on-pay vote, which, under the SEC rules, must be held at least once every three years.  Support among shareholders for say-on-pay proposals is rising—the percentage of failed proposal has decreased from a peak of 5 percent in 2022 to 1 percent  in 2025, an all-time low. Proponents of the say-on-pay votes cite it as a democratizing force in corporate governance that reduces executive compensation while increasing firm value. At the same time, some scholars question the extent of the practice’s impact on executive behavior.

In this week’s Saturday Seminar, scholars discuss how the influence of shareholders on executive compensation shapes executive behavior and business outcomes.

• In an article in the Edinburgh Student Law Review, Zainab Sarhan, a student at the University of Edinburgh Law School, examines whether say-on-pay voting adequately holds executives accountable for excessive compensation. Sarhan explains that both the United Kingdom and the United States have adopted shareholder-voting frameworks on executive pay, but the nonbinding nature of these votes limits their regulatory effect. Despite the U.K.’s 2013 reform introducing a three-year binding vote-on-pay policy, CEO pay at the largest publicly traded British companies rose by 5 percent between 2012 and 2013, Sarhan notes. Sarhan argues that governments should require clearer reporting on how executive pay is determined and set enforceable limits to better align compensation with performance.
• In an article in Legal Studies, Suren Gomtsian of the London School of Economics Law School analyzes how institutional investors use say-on-pay voting to influence executive compensation. Examining more than 1,200 such votes in large U.K. companies between 2013 and 2021, Gomtsian finds that investors often align their voting behavior with recommendations from proxy advisers, giving these intermediaries considerable influence over corporate pay policies. Regulators should increase oversight of proxy advisers and promote greater transparency in how investors make their voting decisions, Gomtsian argues. Gomtsian suggests that enabling investors to evaluate companies individually, rather than voting in uniform patterns, would improve accountability in executive pay practices.
• Gabriel Lozano-Reina, Samuel Baixauli-Soler, and Gregorio Sánchez-Marín of the University of Murcia examine in a study in Business Ethics, the Environment & Responsibility how shareholder say-on-pay votes affect CEO compensation in United Kingdom-based family firms. Lozano-Reina, Baixauli-Soler, and Sánchez-Marín assess whether family ownership and involvement improve compensation fairness and efficiency. They find that say-on-pay effectiveness rises with greater family ownership and control, as families use these votes to check excessive executive power. Family governance and nonfamily CEOs strengthen this effect, Lozano-Reina, Baixauli-Soler, and Sánchez-Marín contend, but as new generations take over, the positive impact of family ownership on say-on-pay vote effectiveness declines. Lozano-Reina, Baixauli-Soler, and Sánchez-Marín conclude that family shareholders’ ethical and emotional investment in the wellbeing of the firm promotes fairer, performance-based CEO compensation.
• Support for say-on-pay votes is linked to increased merger and acquisition transactions and overall CEO performance, argue Shantanu Dutta of the University of Southern California Marshall School of Business and his coauthors in an article in the Journal of Corporate Finance. The Dutta team explains that, without say on pay, executive incentives often do not align with increasing shareholder value because acquisitions resulting in a change of management decouple CEO performance from compensation. Dutta and his coauthors contend that say-on-pay votes align management and shareholders incentives, observing that managers receiving higher say-on-pay support are more likely to secure approval for transactions, receive higher compensation in successful deals, and are less likely to be forced to leave following unsuccessful deals.
• Say-on-pay laws negatively impact employee benefits and welfare, argues Boo Chun Jung of the University of Hawaii at Manoa Shidler College of Business and his coauthors in an paper. Jung and his coauthors explain that the interests of shareholders are unaligned with those of employees, and that shareholders may use say-on-pay votes to pressure managers to lay off employees or reduce labor costs to maximize shareholder returns. The Jung team elaborates that the negative effect of say-on-pay laws on employee benefits and welfare is most pronounced when the CEO is relatively weak compared to the shareholders, employee legal protections are weak. Jung and his coauthors recommend that policymakers consider the impact on workers when evaluating say-on-pay policies.
• In a study in the Journal of Accounting and Economics, Felipe Cabezon of Virginia Tech analyzes the recent trend toward increasingly similar executive pay plans across public companies. Cabezon finds that institutional investors and proxy advisors contribute to this uniformity through their voting power and influential advice among several corporations. Increasing investor scrutiny and proxy advisor recommendations can lead to unfavorable outcomes, Cabezon suggests, if their content is not tailored to the business’s specific situation and needs. He points out that recent regulation requiring compensation disclosures and increased shareholder involvement pushes businesses toward standard compensation structures. Cabezon concludes that uniformity in executive compensation carries potential consequences for the firm, including lower firm valuation and stock returns.