Say on Pay, Does the Buck Stop Here?

Say on Pay, Does the Buck Stop Here?

By
David Larcker, Brian Tayan
2008|Case No.CG12

By 2007, executive compensation at U.S. companies had become an extremely contentious topic. Reports in the press of multi-million dollar pay packages—in the form of stock option exercises, severance packages, and retirement payouts—led to an outcry among many investors that compensation levels had gotten out of hand. Negative sentiments were highest against CEOs who received large severance payments despite the fact that the price of the company’s stock had decreased substantially during their tenure. Corporate governance watchdogs dubbed such situations “pay for failure.”

Critics of executive compensation levels advocated a series of actions to rein in pay. These included increased disclosure about previously obscure contract provisions for severance and retirement packages, urging shareholders to withhold votes from directors who approved excessive pay amounts, and the requirement that executive compensation packages be put before shareholders each year for an advisory vote. This last proposal, commonly referred to as “say on pay,” would give shareholders a direct voice (using the proxy voting procedures) for the first time on CEO compensation. Advocates of say on pay believed that the practice would put pressure on directors to justify proposed compensation amounts rather than rubber stamp pay packages proposed by boards and consultants. They also believed it would improve dialogue between shareholders and directors. Critics charged that the say-on-pay movement was politically motivated by activist investors and public pension funds who were trying to gain influence over matters that should be decided by elected board members. Average shareholders were left to consider what effects, if any, say on pay would have on compensation trends and whether it offered an innovative corporate control or an unnecessary distraction for CEOs and board members.

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