The Obama administration's June 10 announcement that it would seek legislation to require an annual non-binding say-on-pay vote by shareholders on executive compensation at corporations was expected as a centerpiece of its executive compensation reform efforts. Many in Congress are sympathetic to the proposal.
But real-world results of such votes should cause the administration and Congress to lower their expectations that the requirement would result in shareholders reining in executive compensation, and to reconsider the idea that legislation is the best way to institute such a vote.
Through the end of May, for example, shareholders at the financial companies required to have a say-on-pay ratification vote under the American Recovery and Reinvestment Act of 2009 approved the executive compensation.
Bank of America Corp. and Citigroup Inc., two companies that earned the wrath of some shareholder activists, were among those whose shareholders ratified the compensation packages. In addition, Bank of America shareholders defeated a shareholder proposal calling for an annual say-on-pay vote.
Companies should offer their shareholders a say on pay, as a way to determine shareholder sentiment for any change of compensation policy.
But forcing it on them, as legislation would do, instead of allowing them to institute it through shareholder proposals or board rules, as some companies have done, would dilute its impact and effectiveness.
Where companies institute such votes voluntarily, it usually is because of shareholder interest. Where there is no shareholder interest or pressure, a forced vote could result in apathetic shareholders sending the wrong signals, emboldening boards to accept pay practices that misalign the interests of management and shareholders.