From the September 2009 issue of Treasury & Risk magazine

Modulating Say on Pay

Top executives' taking home huge sums of money as their companies ran aground has sparked a visceral protest throughout the country and motivated shareholders to attempt to have some say in compensation practices. The first proxy measures asking U.S. companies to allow a so-called say on pay came up in 2006. This year, shareholders at more than 20 U.S. companies voted on executive pay, and that number could surge now that Congress seems likely to pass a law requiring all public companies to give shareholders a nonbinding vote on executive compensation.

Business groups are lobbying hard against the legislation, but a look across the Atlantic, where big U.K. companies have had such votes since 2003, suggests letting shareholders weigh in on pay might not be such a big deal.

A recent paper by Harvard professors Fabrizio Ferri and David Maber concluded that advisory votes in the U.K. have resulted in changes that make CEOs' compensation more sensitive to poor company performance, but that say on pay has made "no change in the level and growth rate of CEO pay."

U.S. corporate lobbying groups argue that an advisory vote would mean companies will all end up with similar compensation plans. Say on pay "would encourage the adoption of 'cookie cutter' pay arrangements, rather than arrangements carefully tailored to the company," Timothy Bartl, general counsel for the Center on Executive Compensation, said in a statement.

Jean-Nicolas Caprasse, European governance head for advisory firm RiskMetrics, agrees that "pay plans tend to be somewhat more similar than they used to, especially when you're talking about long-term incentive plans' reference periods and metrics." But that might not be a bad idea, he says. "Some of the plans have grown so sophisticated that it's really hard to read them through and assess the possible scenarios."

U.S. opponents also argue that a no vote could leave a company puzzling over what shareholders disliked about the pay package. But in the U.K., the prospect of such votes produced more dialogue between companies and shareholders ahead of the vote, Caprasse says. "Usually investors, especially the largest ones, use these dialogues to communicate concerns, which means in most cases, companies are very much aware what parts of the plan are a problem."

While only a minority of U.K. companies have gotten majority no votes on pay measures, says Paul Hodgson, senior research associate at the Corporate Library, "what has happened as a result of the vote is that the communications between boards and their majority shareholders on the subject of pay have improved fairly significantly."


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