Say on pay
From Wikipedia, the free encyclopedia
“Say on Pay” is a provision in Corporate Governance policy whereby shareholders of a firm have the right to enact or reject resolutions on the compensation of executives. A classical agency problem is at the center of overcompensation. Directors are elected to a Board that has a fiduciary duty to protect the interests of shareholders. Executive compensation is determined by a compensation committee comprised of board members. Proponents argue that “Say on Pay” reforms strengthen the relationship between the Board of Directors and shareholders, ensuring that board members fulfill their fiduciary duty. [1] Critics of the policy believe that “Say on Pay” does not effectively or comprehensibly monitor compensation, and consider it to be reactionary policy rather than proactive policy, because it does not immediately affect the Board of Directors. Some argue it is counter-productive because it diminishes the authority of the Board of Directors. [2] The effect of ‘say on pay’ measures can be binding or non-binding, depending on regulatory requirements or internal corporate policy as determined by proxy votes.
Contents |
[edit] Current laws
Laws have already been introduced in Australia and the United Kingdom to allow shareholders a non-binding, or advisory vote on pay. In the UK, s 439 of the Companies Act 2006 mandates a vote on director pay at the yearly accounts meeting. Directors are expected to have disclosed their remuneration package in a "Remuneration Report" (s 420). Failure to do this leads to fines.
In addition, UK law regulates more tightly a number of elements beyond basic director pay. Employee share schemes that directors have must be approved by ordinary resolution under the London Stock Exchange Listing Rule 9.4.1. Under the Combined Code, with which all listed companies must comply or explain why they do not, a binding vote on approval of long term investment plans is recommended.[1] Under s.188 of the Companies Act 2006 a shareholder resolution is necessary to approve a director’s contract lasting more than a 2 year term (reduced from approval beyond a 5 year term under the old Companies Act 1985, s 319). Lastly, frivolous categories of compensation are limited under s 215, by prohibiting payments for loss of office (i.e. no golden parachutes), except, under s 220, in respect of damages for existing obligations and pensions.
[edit] EU proposals
The European Union has remained tentative about harmonizing rules on CEO pay. In the High Level Group of Company Law Experts' Final Report in 2002, they stated they would not wish to impose a requirement for voting EU wide, yet.
"Some Member States require, or are considering requiring, a form of mandatory or advisory vote by shareholders on the remuneration policy. We do not believe a shareholder vote on the remuneration policy generally should be an EU requirement, as the effects of such a vote can be different from Member State to Member State. The important thing is that shareholders annually have the opportunity to debate the policy with the board.[2]
However, a different approach is taken to share schemes, which were recommended to be more closely scrutinised.
[edit] Say on Pay Legislation in the United States
There have been several recent efforts to require Say on Pay resolutions in the United States. In 2007, the Chairmen of the Financial Services Committee Rep. Barney Frank passed legislation in the House of Representatives that gave shareholders a non-binding vote on executive compensation. [3] Then a Senator, Barack Obama authored a "Say on Pay" proposal, but his legislation stalled in the Senate. [4]
The economic crisis has affected corporate governance in the United States. The Emergency Economic Stabilization Act of 2008, which established the Troubled Assets Relief Program, required say on pay resolutions at companies with outstanding funds from the TARP. [5] In the American Recovery and Reinvestment Act of 2009, Senator Chris Dodd amended Section 111 of the EESA, and updated policy on Executive Compensation in Section 7. The amended legislation continued the "Say on Pay" policy established originally in the EESA. [6]
On February 4, 2009, Treasury Secretary Timothy Geithner stated that companies that have received exceptional financial recovery assistance from the TARP fund would have to subject executive compensation to "Say on Pay" resolutions. [7] On June 10, 2009, Secretary Geithner stated that the Administration supports "Say on Pay" legislation, and it would authorize the SEC would to implement "Say on Pay" regulations at all companies, not only those that have outstanding funds from the TARP, contingent on Congressional approval.[8] Additionally, the Treasury reconciled its proposals from February 4th with Congressional amendments to the EESA in the Final Interim Rule on TARP Standards for Compensation and Corporate Governance. [9]
[edit] Examples of shareholder "revolts"
What follows is a list of incidents with large UK companies, where shareholders have "revolted" against the size of pay awards given to board members since the "say on pay" legislation was introduced.
- Vodafone shareholders voted 10% against, and 30% in abstention from £13m in shares for CEO Sir Chris Gent, 25.7.2001.
- Royal and Sun Alliance shareholders voted 28% against a £250,000 retention bonus for CFO Julian Hance and £1.44m severance pay for CEO Bob Mendelsohn. The share price had just dropped. 14.5.2003.
- GlaxoSmithKline shareholders voted 50.72% (advisorily) against a £22m bonus salary and stock severance package for CEO Jean-Pierre Garnier, 20.5.2003. Chairman Sir Christopher Hogg said it was just the difference in culture to the US that was holding Britain back and they should accept it. The TUC had been lobbying pension funds.
- ITV shareholders were 40% against a £15m (£1.8m cash, rest shares) payoff to Chairman Michael Green. It was justified on the basis that he would have taken legal action were it not paid, because he was removed prior to the Carlton/Grenada merger.
- Berkley Managing Director and founder of the property company had 47% of shareholders vote against his £1.2m (out of a total £4.7m package) under a long term incentive scheme that he had not actually belonged to, 23.8.2003.
- Unilever, 24.4.2005, former chairman Niall Fitzgerald got £1.2m after profits fell.
- Tesco shareholders voted 15% against an £11.5m bonus on Sir Terry Leahy’s salary as CEO. It was linked to the success of Fresh&Easy in the US. The association of British insurers and Pirc were against. 30.6.2007.
[edit] Academic scepticism
Two more conservative professors, Brian Cheffins of Cambridge University and Randall Thomas of Vanderbilt University predicted that a 'say on pay' could hold back sudden jumps, but it would not stop the general upward drift in pay rates. [10]
[edit] Related Articles
[edit] Notes
- ^ Combined Code B.2.4
- ^ High Level Group of Company Law Experts, Final Report (2002) p.65; from the EU Commission's website on company law modernisation.
[edit] External links
- Joann Lublin 'Candidates Target Executive Pay' (12.4.2008)
