The Obama administration's proposal to give shareholders a non-binding vote on executive compensation would give investors more influence on corporate governance and put more pressure on corporate boards.
The administration will seek legislation to require the annual say-on-pay vote at all publicly held corporations and to give the Securities and Exchange Commission power to ensure corporate compensation committees are more independent, according to a June 10 statement by Treasury Secretary Timothy F. Geithner.
“With respect to say on pay, what the government is relying on is pressure by shareholders and potential embarrassment to companies to the extent they don't take into consideration shareholder views,” said Kenneth A. Raskin, New York-based partner and the head of the global executive compensation, benefits and employment law practice group of the law firm of White & Case LLP.
“At the end, the vote is still non-binding. But companies will take these things seriously because what is binding is the shareholder vote” to replace members of the board who ignore shareholder discontent, Mr. Raskin said.
Timothy Smith, senior vice president of Walden Asset Management, Boston, a unit of Boston Trust & Investment Management Co., said the announcement “comes at the tail of what has been a very active proxy season on say on pay. Clearly investors are very supportive of this reform and that should be a factor as Congress considers it.” Walden withdrew its say-on-pay proposal at Intel Corp. after the company's board in January agreed to implement such a vote.
Say on pay, coupled with the administration's guidelines for executive compensation standards, “focuses on rewarding performance on a long-term basis without taking excessive risk,” Mr. Raskin said.
Claudia H. Allen, Chicago-based partner with the law firm Neal Gerber & Eisenberg LLP, said the administration's proposal “strikes a middle ground without doing something so restrictive it would undermine the ability ... of companies to compete.”
The Center on Executive Compensation, Washington, created by the HR Policy Association, which represents senior human resources executives of more than 260 of the largest U.S. corporations, opposes the say-on-pay vote.
“The center believes that improvements in disclosure that clarify the link between pay and performance would be the best way to improve pay practices in the U.S., rather than mandating annual pay votes for all 12,000 publicly held corporations,” Timothy J. Bartl, the CEC's senior vice president and general counsel, said in a statement.
Executive compensation disclosure, “while dramatically better than what existed prior to 2007, is still currently obscured and takes a significant amount of sleuthing to discover,” Mr. Bartl said in the center's statement. “By clearly disclosing this link, companies would be better able to explain their programs and shareholders would have the tools to hold companies accountable. Better disclosure is far preferable to a mandated annual vote.”