Rock Center: Ten Myths of Say on Pay

17 11 2012

This post summarises the findings of an interesting paper called Ten Myths of Say on Pay (Larker et al) published by the Rock Center for Corporate Governance. The executive remuneration debate is hard to balance and at times even harder to conceptualise. Other academics such as Professor Cheffins and Randall Thomas argue that sudden increases in pay can be controlled through say on pay but in the long run executive pay would continue to increase. It seems that there is truth in both approaches and the Rock Centre’s paper is worth reading to get insight on the remuneration debate in a US-UK perspective. In any event, the “ten myths” are:

(1) There is only one approach to say on pay: it is argued that given the views that are out there, no one can agree on how to solve the problems of compensation.

(2) All shareholders want the right to vote on executive compensation: it is said thatPrior to Dodd-Frank, shareholder support for proxy proposals requiring say on pay routinely failed to garner majority support. Among the 38 companies where shareholders were asked to vote whether they wanted the right to vote on executive compensation in 2007, only two received majority approval.

(3) Say on pay reduces executive compensation levels: These trends have held steady despite the fact that average compensation levels continue to rise. According to a recent study, total median compensation among large U.S. corporations rose 2.5 percent in 2011, following an 11 percent increase the previous year.The failure of say on pay to reduce compensation levels was to some extent anticipated by researchers. Ferri and Maber (forthcoming) studied compensation trends in the United Kingdom and concluded that say on pay did not reduce overall pay levels in that country.

(4) Pay plans are a failure if they do not receive very high support: Calls for supermajority approval might reflect the desire of dissidents to increase their influence over corporate directors and executives rather than a true economic need.

(5) Say on pay improves pay on performance: A … reasonable assessment of pay for performance would compare the amount earned by an executive (determined as the value vested or received in a given period) relative to the operating and stock price performance during the same period.

(6) Plain vanilla equity awards are not performance based: The research evidence does not support the notion that plain-vanilla equity awards are insufficient as performance incentives or that they fail to align the interests of shareholders and managers.

(7) Discretionary bonuses should never be allowed: There are clearly settings where discretionary factors can produce positive incentive benefits, particularly when the economic environment or industry setting is highly uncertain, making it difficult for the board to assign meaningful performance goals at the beginning of the year.

(8) Shareholders should avoid not-standard bonuses: Rather than reject such benefits categorically, shareholders should first determine whether they have an economic justification … Nonstandard benefits should be evaluated in terms of their economic value to the firm, rather than fixed rules or guidelines.

(9) Boards should adjust pay plans to satisfy dissatisfied shareholders: The true benefit of say on pay might be improved relationships between boards and institutional investors, rather than improved economic decision-making.

(10) Proxy advisory firm recommendations for say on pay are correct: Research evidence demonstrates that these recommendations are highly influential, both on voting outcomes and on pay structure … studies find that the voting recommendations of proxy advisory firms regarding stock option exchange programs are similarly value decreasing.

The paper is available below


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