Say-on-pay legislation requiring companies to have an annual, non-binding vote on executive compensation is unfortunate, but necessary.
Its unfortunate because the corporate governance movement already is pushing companies in the direction of allowing shareholders a say on pay, and its generally far better for corporations and their shareholders to work these issues out themselves than to have Congress force the issue.
Its necessary because the proposal by Rep. Barney Frank, chairman of the House Financial Services Committee, likely will head off another congressional attempt to limit executive compensation by legislation.
That was tried in 1993, and we all can see how well that worked. The surge in top executive compensation since then was one unintended consequence of that effort. This time, Congress would likely impose more draconian restrictions, and the unintended consequences could be even more dramatic.
The congressional rush to do something to rein in executive compensation is occurring too soon. There is clear evidence that the corporate proxy process is beginning to have an effect. Shareholders might have only indirect power, but they have learned in recent years how to wield that power to force corporate boards to take shareholder concerns into consideration.
Congress should allow more time for the proxy process to bring about meaningful changes in executive compensation practices.
Some major corporations are examining the say-on-pay proposal in a collaborative effort with large institutional investors through participation in a working group on the idea. This collaboration is continuing.
One corporation, Aflac Inc., already adopted a say on pay in February, even though the idea is only a year old in the U.S.
In addition, the Securities and Exchange Commissions new rule on greater executive compensation is taking effect with this proxy season, giving shareholders a new, valuable window into executive pay. This increased visibility of executive compensation, and the requirement that the total costs of the packages be tallied, has stimulated some compensation committees to more closely examine the total cost of the goodies they have awarded their chief executive officers. This greater disclosure, given time, might well lead to voluntary adoption of say on pay at more companies.
Shareholders have made great strides in other areas of corporate governance reform in recent years through their own initiatives.
Shareholders will be more empowered and CEOs and boards will value or fear their participation more if they can muster majority votes for such proposals.
One problem with a congressional mandate for say-on-pay is that it could encourage a revival of complacency among shareholders. They might simply rely on Congress to step in and fix a problem.
Second, Congress doesnt have a good record of fixing problems best left to market forces.
Another problem is that proxy-voting issues such as compensation generally have been the purview of state regulations. A federal requirement for a say on pay could run afoul of state regulations or laws, opening the possibility of legal challenges that might derail or defer an effective and growing movement toward voluntary say-on-pay adoption.
Shareholders should have a non-binding vote on executive compensation. If top executives are doing a good job and the stock is performing well, shareholders will approve the pay packages, and no one can complain if the compensation appears high.
But that vote should be secured through discussions between management and shareholder groups.
Unfortunately, given the outrage aroused by sky-high compensation packages awarded to a few apparently non-performing CEOs, it apparently is too late for that.
Passage of Rep. Franks proposal might be necessary to head off even more drastic and damaging legislation.