Despite disappearing profits
and a shrinking economy, many of America's top CEOs and senior executives
continue to command higher pay packages.
A recent Associated Press study of Standard & Poor's 500
companies revealed that the median pay for CEOs in 2007 was about $8.4
million. Not bad for a weakening economy.
Escalating executive compensation has resulted in institutional
shareholders demanding a "say on pay" for executive compensation packages.
The say on pay movement began in 2006, when institutional shareholders
began submitting annual meeting proposals to companies requesting that
shareholders be allowed to vote on all or certain aspects of executive
compensation, the results of which would be nonbinding on the company.
According to RiskMetrics Group Inc., in 2006 the annual-meeting
proxy statements of seven companies had a shareholder proposal on
executive compensation, netting about 40% yes votes on average. In 2007,
52 proxy statements contained a say on pay proposal, averaging 42.7%
support for the proposals. By 2008, 54 companies have had say on pay
proposals in their proxy statements. All told, a majority of shareholders
at nine companies gave say on pay the thumbs-up in 2007, compared with
eight in 2006. These results are not staggering, and the movement has not
gained the momentum advocates had hoped.
Proponents argue that the say on pay voting mechanism is important to
the system of checks and balances between shareholders and boards of
directors. Shareholders believe that executives are raking in huge
earnings despite languishing stock prices and corporate earnings, and an
extra layer of regulation will ensure that executive compensation is more
closely tied to corporate performance. Say on pay is good corporate
governance and a way for companies to promote transparency and
Opponents of say on pay generally cite three major points. First, a
board of directors is elected by the shareholders to oversee management in
the best interests of the shareholders. Central to that role is hiring and
maintaining executive talent and incentivizing their performance. To shift
that function to the shareholders, even if indirectly through an advisory
vote, would work to undermine the essence of the board's independent
governing function. Opponents also argue that shareholders are ill
equipped to vote in an informed way on say on pay, as they do not have
access to the same information as directors to evaluate whether the amount
and types of compensation are appropriate.
Lastly, the say on pay vote is criticized as being ineffective. A yes
or no vote, opponents argue, contributes little to resolving disputes
about executive compensation. And with only nonbinding votes on the table,
little can be done to force companies to implement them.
Say on pay has now become a significant campaign issue. In an interview
with Fortune magazine earlier this summer, Sen. John McCain, the
Republican presidential nominee, supported the say on pay concept, stating
that "[corporations] can best restore their credibility with the American
people by basing their compensation on performance." McCain, however,
stops short of advocating that say on pay be written into law, as Britain
On the Democratic side, Sen. Barack Obama supports new laws on the
matter. In an April 2008 speech he said, "It's about changing a system
where bad behavior is rewarded so that we can hold CEOs accountable, and
make sure they're acting in a way that's good for their company, good for
our economy, and good for America, not just good for themselves."
Political posturing aside, the populist message of reining in corporate
greed and excessive wealth resonates with most Americans, particularly
now, when there is an increasing divide between rich and poor. Although
few people will question the merits of promoting sound public policy and
accountability in the corporate world, there is disagreement on how say on
pay contributes to those goals.
Both sides have valid points.
Corporations and shareholders
should therefore focus on crafting a strategy that more closely aligns
executive compensation with achieving their shared goal of maximizing
Mary-Laura Greely and Pamela
Greene are members of the corporate section at Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo PC.