Pay Versus Performance and Investor Voting Decisions

We analyze whether the SEC’s Pay Versus Performance (PVP) disclosure rule lowers the cost of processing CEO-pay information. Using hand-collected disclosures, we show that larger divergences between the newly disclosed compensation actually paid (CAP) and already required pay disclosure methods correlate with changes in voting support for Say-on-Pay and compensation committee directors, especially when compensation is harder to evaluate. Placebo tests using CAP that firms disclosed only retroactively, and that investors had not yet observed, reveal no comparable association in the prior year, supporting a disclosure-driven interpretation. Investors respond negatively when CAP is high relative to traditional reported pay and stock returns are weak, consistent with concerns about pay-performance misalignment. These inferences hold for the Big Three institutional investors and proxy advisors, suggesting that PVP disclosures also inform sophisticated investors and information intermediaries. Overall, the PVP rule appears to improve the decision-usefulness of CEO-pay disclosures by lowering information processing costs for capital market participants.