Tpics, Issus, Ctvsis i Cpt Gvc Lsip
STANFORD CLOSER LOOK SERIES
stanord closer look series 1
T Mts f “S P”
“Say on pay” is the practice o granting sharehold-ers the right to vote on a company’s executive com-pensation program at the annual shareholder meet-ing. Say on pay is a relatively recent phenomenon,having been rst required by the United Kingdomin 2003 and subsequently adopted in countries in-cluding the Netherlands, Australia, Sweden, andNorway. Te U.S. adopted say on pay in 2010 aspart o the Dodd-Frank Wall Street Reorm andConsumer Protection Act. Under Dodd-Frank,companies are required to hold an advisory (non-binding) vote on compensation at least once every three years. At least once every six years, companiesare required to ask shareholders to determine therequency o uture say-on-pay votes (with the op-tions being every one, two, or three years, but noless requently). Advocates o say on pay contendthat the practice o submitting executive compensa-tion or shareholder approval increases the account-ability o corporate directors to shareholders andleads to more ecient contracting, with rewardsmore closely aligned with corporate objectives andperormance.
Myth #1: there Is only one ApproAch to“sAy on pAy”
Despite what many believe, there is no single policy or implementing “say on pay” that is uniormly adopted across countries. Instead, models or say on pay vary considerably. In some countries, share-holders are asked to vote on the compensation o executive ocers, while in others they are asked tovote on the compensation o the board o direc-tors (which typically includes the CEO). In someinstances, shareholders are asked to approve the
By dv . l, a l. Mc,Gz omzb B tyJu 28, 2012
compensation policy (its overall objectives and ap-proach), while in others they are asked to approvethe compensation structure (the specic size and el-ements granted the previous year as well as currentpolicy). Say-on-pay votes might be binding, mean-ing that the board o directors must take action toaddress shareholder dissatisaction i the pay planis rejected. Alternatively, say-on-pay votes mightbe advisory (precatory), whereby the board o di-rectors has discretion whether to make changes orleave the plan unchanged. In some countries say onpay votes are legally mandated, while in others they are voluntarily adopted due to market pressures. Forexample, prior to the enactment o Dodd-Frank,companies such as Aac and Verizon voluntarily ofered shareholders a vote on executive compen-sation contracts even though they were not legally required to do so. Countries such as Switzerland,Germany and Canada continue to allow voluntary adoption o say on pay, without making it a legalrequirement—although Switzerland is moving to- ward a compulsory system (see Exhibit 1).Currently nobody knows which, i any, o theseapproaches is the best or rectiying compensa-tion problems. It might very well be that diferentmechanisms are efective at mitigating diferentproblems (e.g., excessive pay levels vs. lack o pay-perormance alignment) or that market pressuresare sucient, without say on pay being required atall.
Myth #2: All shAreholders WAnt therIght to Vote on executIVe coMpensAtIon
A related myth is that markets respond avorably to a regulatory requirement or say on pay. Tat is,many governance experts and lawmakers believe