Because “say-on-pay” voting has not reined in executive compensation as much as some corporate governance reformers had hoped, the question becomes: Should more teeth be put into the shareholder vote, perhaps even making it binding?
In the United Kingdom, the government of Prime Minister David Cameron has unveiled proposals to intervene and give shareholders more control over executive compensation.
Vince Cable, the British Secretary of State for Business, Innovation and Skills, and president of the Board of Trade, outlined a series of remuneration proposals on Jan. 24, including one that would give shareholders binding votes on executive pay policies and severance payments worth more than one year's salary.
Among the proposals, companies would have to get 75% of shareholder support for the pay and severance policies to pass. The formal proposals specifying the details are expected to be issued later this year for public comment.
A call for such intervention could come to the United States in the future, just as the non-binding “say on pay” — initially adopted in a number of countries, including the United Kingdom in 2003 — was embraced in the U.S. market in the late 2000s by activist shareholders. It was mandated last year for all companies under authorization by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Making “say-on-pay” binding is a bad idea.
Majority votes overturning pay policies negotiated with senior management by the corporation's board could run up against issues of contract terms and law.
Further, the binding vote might make shareholders reluctant to use their power, for fear of triggering unintended consequences. They might fear limiting the board's ability to design competitive pay packages that align executive compensation with shareholder interests, driving out competent, experienced top management, and generally causing corporate disruption.
Setting pay should remain the responsibility of the board, although shareholders should, through their vote, encourage companies to engage in dialogue with shareholders to understand their concerns about executive pay.
Indeed, some companies have been engaged in consulting with investors in advance of the vote to make constructive changes to the design of their pay packages and policies to make them more acceptable to shareholders in order to win a high percentage of votes.
Corporations, for their part, have to recognize that concern about excessive or misaligned executive compensation resonates among shareholders as a corporate governance issue, and with the public, making it a political issue.
Unless they bring pay policies into alignment with shareholder interests, corporate boards risk provoking reaction such as Mr. Cable's proposal. Corporations and shareholders should recognize they are better served keeping executive compensation as a corporate governance issue than having it become public policy issue.
A British Department for Business Innovation and Skills 46-page discussion paper on executive remuneration stated:
“(O)ver the last decade, the link between pay and performance has been hard to discern. CEO pay has risen faster than the increase in the FTSE 100 index, retail prices or average remuneration levels across all employees for the same period.”
The paper failed to recognize that over the decade, globalization had increased the scale and complexity of many corporations, the level of competition, and thus the level of skill and knowledge required in managing such corporations, and that this might explain rising pay.
Even Kenneth R. Feinberg, the special master for TARP executive compensation, could not dictate executive compensation of companies under the Troubled Asset Relief Program. According to a Jan. 23 report by Christy L. Romero, deputy special inspector general for TARP, Mr. Feinberg “could not effectively rein in excessive compensation at the seven companies (he oversaw) because he was under the constraint that his most important goal was to get the companies to repay TARP.” That is, he had to pay up to get the talent he needed to protect taxpayer interests.
In the United States, shareholders already have useful tools to help them assess and compare executive compensation across companies.
The Securities and Exchange Commission adopted more extensive executive pay disclosures that took effect in 2007.
Companies have adopted clawback provisions, driven by shareholder proposals and ultimately required under SEC rules.
In addition, starting last year companies were required to hold advisory shareholder votes on the golden parachutes, or severance agreements, of top executives.
Shareholders also can hold accountable their investment advisers on how they vote proxies on executive compensation issues. The Dodd-Frank Act requires institutional investment managers to publicly disclose their votes on “say-on-pay” ratifications and golden parachutes. In addition, the SEC adopted a rule in 2003 requiring mutual funds to disclose their voting records on all proxy proposals.
Shareholders already have a lot of ways to evaluate executive pay and keep it aligned with their interests. They don't need further governmental intrusion.
Government intervention in corporate governance purports to seek to give shareholders, as owners, powers they should have. But often shareholders exercise their power in ways that might not match certain expectations. n
