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Column

Robert H. Rock
Chairman and Publisher
Directors & Boards

‘Say on Pay’: A Populist, but Misguided, Notion
If shareholders are unhappy with executive compensation, there’s a better way for them to get their message across.

By Robert H. Rock

Throughout this election season the two presumptive presidential candidates have been highlighting their differences; however, on one thing they do agree — ‘say on pay,’ the corporate governance initiative that gives shareholders a vote on executive pay packages.

Both Barack Obama and John McCain are vigorously supporting proposed legislation mandating a nonbinding resolution on the ballot at each annual meeting asking for shareholder endorsement of executive compensation practices. The legislation passed the House of Representatives by a 2-1 margin, and a similar bill, introduced by Sen. Obama, is awaiting action in the Senate. Not to be outdone, Sen. McCain came out with an even more far-reaching endorsement, suggesting that the shareholder vote be binding, not merely advisory.

For politicians, in particular presidential candidates, say on pay is a populist position too good to pass up. Incensed by egregious CEO pay packages, politicians of every stripe are jumping on the say on pay bandwagon in an effort to be seen as reining in corporate excess. Up until now President Bush’s opposition has helped block passage of the bill in the Senate, but come next year, say on pay almost certainly will become the law of the land.

Proponents of the bill insist that they are not trying to exert power over boards in managing executive compensation but, rather, want to institute a “dialogue” between the board’s compensation committee and shareholder representatives. Pointing out that an advisory vote on executive compensation is now standard practice in many countries, including Britain, Australia, and Sweden, they contend it can fortify boards to resist the excessive demands of overly greedy executives. In most countries, the shareholder vote is only advisory; however, in a few, such as the Netherlands, the vote is mandatory.

So far only a handful of companies, such as Verizon Communications, Blockbuster, and Apple, have adopted say on pay. Despite activists’ expectations of a surge in support, shareholder votes in favor of say on pay resolutions remained flat in 2008 at 43% of votes cast. Most American corporations and their representatives, such as the U.S. Chamber of Commerce and the Business Roundtable, vehemently oppose the pending legislation, and virtually all companies that have received a resolution to institute an advisory vote have chosen to oppose it. They contend that a board cannot effectively “dialogue” with shareholders because they can never have the necessary level of understanding of executive compensation issues, even with the SEC’s enhanced disclosure requirements.

Should shareholders have the right to an advisory vote on executive compensation? With the exception of where compensation is egregious, I don’t think so.

As a member of three compensation committees and chair of two, I see how hard directors work to tie rewards to performance. In general, I think the Compensation Discussion and Analysis makes a convincing case that pay policies and practices are performance-based and supportive of shareholder value creation.

Consequently, I am generally opposed to shareholder say on pay resolutions. The details of a CEO’s compensation package should be left to the compensation committee.

If shareholders do not like its decisions, they should withhold their votes for the re-election of compensation committee members. That’s a better way to get their message across.

Robert H. Rock is chairman and publisher of Directors & Boards. He can be contacted at rrock@directorsandboards.com.