VideoFor a measure that fewer than 10 of the 17,000 or so U.S. public companies have adopted, "Say on Pay" certainly has heated up a cauldron of strong feelings among many who have high stakes in executive-compensation matters.
Aside from the executives themselves, who presumably prefer their pay higher than lower and with lucrative incentives, such interested parties prominently include large institutional shareholders and their supporters, who have driven the movement to give investors an advisory vote on executive compensation; and compensation consultants—virtually all of whom characterize Say on Pay as stupid and a sham.
In May, Aflac became the first publicly held American company to hold a shareholder advisory vote on pay. The insurance firm's proposed senior-executive compensation package was approved by a 93 percent landslide.
Aflac was among dozens of companies at which shareholders filed Say-on-Pay proposals during the 2007 proxy season, and about 100 were filed this year. But few have received the majority approval that's required before a board of directors will even consider adopting the measure.
This year, on average, only about 43 percent of shareholders have voted to give themselves a greater voice on executive compensation, according to Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees (AFSCME), a leading proponent of Say on Pay. That percentage is up slightly from last year, he noted.
Aside from Aflac, companies that have agreed to adopt Say on Pay include Verizon, Blockbuster, Apple, and Lexmark, all of which are expected to have their initial votes in 2009. Shareholders at a handful of other companies, including Motorola, have approved the measure but so far have failed to persuade those firms' boards to alter their policies.
It's possible that at some point there won't be a choice. Legislation that would require public companies to let investors weigh in on executive compensation, proposed by Rep. Barney Frank (D-Mass.), was passed by the House of Representatives last year. It is currently awaiting action by the Senate, where it is sponsored by presidential candidate Barack Obama. John McCain and Hillary Clinton also support the concept.
Say What?
A curious aspect of the tussle over Say on Pay is that it arguably does not give shareholders all that much say. The proposals that have been approved call for non-binding, advisory votes. And investors don't opine on the compensation for individual executives, but merely the aggregate for the five named in a company's proxy statement.
What's more, even without Say on Pay, shareholders wield significant authority. They get to approve all equity-based compensation plans in a binding vote that is required for a company to be listed on the New York Stock Exchange. And, "it's the equity plans that really create the big numbers that are the source of the pay objections," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
In many cases, they get to okay annual bonuses as well because of IRS rule 162M, which requires that in order for a company to claim a tax deduction on an executive's compensation above $1 million, any incentive plans that could push the total past that amount must be approved by shareholders.
Of course, shareholders can also withhold votes for directors on a company's compensation committee if they don't like the pay packages executives are granted.
What, then, is all the fuss about?
It's All About Accountability
Shareholder groups see Say on Pay as a key cog in mandating greater accountability for corporate executives.
"Our view is that compensation is significantly broken now because of a perverse set of incentives that are in play, and Say on Pay could help correct some of that," said AFSCME's Ferlauto. "For example, it could result in pay being distributed more equitably among executive officers. And it could result in pay being used as a way to develop internal talent and reward long-term performance, which is always more effective than going outside the company and bringing in the latest rock star."
Ferlauto called Say on Pay "an important mechanism that provides a check against compensation committees who are too willing to give the benefit of the doubt to CEOs who are not performing and expecting large paychecks."
But aren't all the existing shareholder rights vis-a-vis executive compensation sufficient? Not at all, according to Paul Hodgson, senior research associate with The Corporate Library, a for-profit governance research firm whose clients include both investment firms and corporations.
"Being able to vote on incentive and stock-compensation plans, and also being able to give an up-or-down vote on compensation-committee members, is all very well," said Hodgson. "But voting on the actual pay — the outputs of those incentive plans — is significant."
Equity plans typically give companies tremendous leeway to put almost any kind of compensation into practice, according to Hodgson. A plan might stipulate generally that the company can award stock options, restricted stock, restricted stock units, performance shares, long-term cash bonuses, or some combination thereof. It might include parameters that will never be reached, such as "no individual may receive any more than 5 million shares in a year."
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