Passive Institutions and Long-Run CEO Compensation: Evidence from Proxy Voting

Abstract

A one-standard-deviation increase in passive ownership leads to a 25% increase in the compensation duration. I find proxy voting is the channel through which passive investors affect incentive horizons. Since the passage of the Dodd-Frank Act, passive funds tend to vote more against Say-on-Pay (SOP) proposals, and SOP proposals are less likely to pass with higher passive ownership. Moreover, passive ownership is associated with a greater number of shareholder-sponsored compensation proposals and an increased likelihood of these proposals passing. The overall findings indicate that passive institutions work to lengthen CEO compensation to align incentive horizons, and proxy voting is the mechanism through which they exert influence.