Selective “Say-on-Pay” the Best Remedy

We recently published an article on “say on pay” that questions the value of routine shareholder votes on executive compensation.

We cite the limited impact of existing shareholder votes on equity-based compensation and note that in many situations, even the best disclosures do not allow shareholders to fully grasp the financial impact of compensation arrangements. We also note a timing problem: shareholders generally defer to board decisions until governance problems become clear and present. At this point, a problematic compensation plan will likely be years old and beyond attack.

We also argue that because there is no substitute for an independent board negotiating compensation at arm’s length, giving ultimate say to shareholders risks harming the quality of compensation by diminishing board authority.

We conclude by proposing that shareholders be allowed to vote on pay, but that such votes be held only when requested by a substantial shareholder. Governance advocates would have an incentive to be selective in their challenges since their credibility with larger institutions is crucial for effective advocacy, and the relative rarity of such votes would prompt greater focus by institutional investors and the proxy advisory services.

The article is available here.