For 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.”

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.”

Emotions may come into play also because shareholder voting on executive pay has become a populist issue, noted Mark Poerio, global executive compensation and benefits practice leader at the law firm Paul, Hastings, Janofsky and Walker. That could boost the chances for the pending legislation to pass, he noted disapprovingly.

“In theory, next year there will be another hot issue and Congress will pass another law that says shareholders have to approve overseas investments, or outsourcing, or some other hot issue of the day,” Poerio said.

Hodgson, though, said the legislation is unlikely to go anywhere. “There will be an awful lot of lobbying going on, so I’m not sure how much success there will be getting it through the Senate.”

Give ‘Em the Boot?

The question remains, though: What’s wrong with holding the compensation committee responsible for excessive compensation by withholding votes for their continued presence on the board?

“Say on Pay doesn’t solve the significant compensation problem in this country, which is the directors who approve problematic pay packages,” Elson said. “The fact of whether or not you supported the package doesn’t cure the poor oversight. If you don’t like what directors have done, replace them.”

Others see that as an unacceptably aggressive. Choi called it “the nuclear option, if you will.” AFSCME’s Ferlauto said booting board members “is a sledgehammer, where a scalpel might be more appropriate, at least initially.”

If there’s a well-functioning board that’s good at strategic planning and has the right mix of talent and experience and there are objections to the way pay is used, “do you really want to vote those people out?” Ferlauto said. “What you want to do is send a message to the compensation committee that you’re voting against the problem itself, which is the pay.”

Crystal Ball

Assuming the legislation doesn’t pass, what is the likely course for the Say on Pay movement?

“I think it’s a blip,” said Dolmat-Connell. “Certainly you’re not going to see the vast majority of public companies doing it.” He acknowledged, though, that as many as a few hundred, mostly large companies might end up with shareholder advisory votes.

Countered Ferlauto, “The ball is rolling. We’re getting stronger support this year. I think companies are going to feel pressure that if they don’t move voluntarily toward adoption, there is legislation that may be less flexible for them.”

Johnson couldn’t help but agree, despite his antipathy for Say on Pay. “After Sarbanes-Oxley, it’s one more nail in the coffin for being a public company in the U.S.,” he said, “but I think it will come — slowly, but it will come, because it’s politically correct.”