Voting on these plans is "like voting on the outline of a story before it's written," said Hodgson. "Most incentive plans are very similar to each other, but their eventual outcomes — the stock-option grants and long-term incentive grants — are very different, in terms of both the performance measures used and the amounts."
With Say on Pay, shareholders vote on compensation as described in the Compensation Disclosure & Analysis section of the proxy statement. For companies that adhere to the Securities and Exchange Commission's new rules requiring expanded disclosure, as more and more are doing, the CD&A should provide a good idea of what amounts have been paid out, which awards have just vested, and what is likely to be paid out at various future points. Voting on this is "voting on the story itself," said Hodgson.
A Slippery Slope
On the negative side of the issue are the compensation consultants — even though most claim that if Say on Pay were widespread, it would produce more business for them as companies strived to make sure their pay packages would pass shareholder muster.
"Say on Pay isn't the only thing that is really stupid that generates business for me," said Alan Johnson, managing director of Johnson Associates in New York, a consulting firm. "For example, there's IRS 162M, which hasn't done one scintilla of good for the economy or shareholders or anyone else, but has generated untold fees for consultants and lawyers."
The Corporate Library's Hodgson reacted with skepticism to the idea that Say on Pay will produce business for consultants, and he suggested a basis for their steadfast opposition to Say on Pay. "I think some of them are concerned about the exposure of their advice that it might lead to," he said. "If you're a consultant who has designed a pay policy that received a 'no' vote from a company's shareholders, that isn't going to look great on your résumé."
There's also the suggestion that Say on Pay might expose a fundamental conflict of interest that consultants may face in serving their corporate clients. The conflict, some say, is that the consultants structure pay packages that enrich executives who are in a position to use other services the consultants provide, such as employee-benefits and risk-management services. That issue has been the focus of a House of Representatives probe.
That doesn't mean, though, that the consultants don't have some plausible arguments to make against Say on Pay. Indeed, Elson of the University of Delaware finds himself in their camp on some of the issues, despite his belief that they have in fact played a role in driving up executive compensation.
One such issue: The shareholders, after all, own the company, so why shouldn't they play a role in determining compensation?
"If you believe that, then why don't they vote on the capital budget?" said Johnson. "That's way bigger and more important. Companies can spend billions of dollars, but now we're going to have shareholders vote on what kind of perks CEOs should have?"
Elson agreed. "It's a slippery slope when you think about going from pay to other issues," he said, and added that adopting Say on Pay sets a dangerous precedent. "It diminishes the board's authority, which is problematic, because only a strong board can hold management accountable to investors. And you need that oversight, because the shareholdership is too large to have a Vermont-style town meeting to run the company. It's the same reason we have a Congress."
But Hye-Won Choi, head of corporate governance for TIAA-CREF, insisted that compensation is the critical issue. "It's the most important responsibility of boards, and probably the most difficult to get right, because it involves sensitive issues," she said. "It reflects on the overall quality of governance of the company. We think that if the board can get compensation right, it probably can do everything else right as well."
Where the Heart Is
Another central argument by consultants is that a shareholder vote on pay is likely to be based on emotions rather than facts.
"If Google decided to pay its founders a quarter-billion dollars apiece, I don't think anyone would care," said Jack Dolmat-Connell, president of consulting firm DolmatConnell & Partners, "because everyone loves Google. Everyone loves Apple because of iPods. Everyone loves Aflac because of the duck. If an oil company had Say on Pay, the compensation package probably would get voted down, because people hate oil companies right now."
Many shareholders, particularly smaller ones, can be expected to read only part or even none of the CD&A in the proxy, he added. "They won't be making a rational, informed vote," he said. "They won't have enough information."
Johnson agreed. "Compensation issues are difficult enough to handle for a compensation committee that works on them all the time," he said. "To ask shareholders for their views is going to be a burdensome side show."
To that Choi of TIAA-CREF responded, "I can't believe they're saying that." Most shares are held not by retail investors anymore but very sophisticated institutions, pension funds, and mutual funds, she noted. "If we're able to make decisions whether to invest, we can evaluate compensation programs to determine whether they're in our long-term interests."
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