The long-running debate over
“say on pay” is heating up in Washington, with a group representing
executives saying that the proposal undermines the role of directors
while an investors' group counters that it makes boards more accountable
The Obama administration
two weeks ago threw its support behind say-on-pay, proposing that the
Securities and Exchange Commission be given the power to mandate
non-binding shareholder votes on executive compensation at publicly
That would take a key
responsibility out of the hands of board members, who are elected for
their expertise, said Charles Tharp, executive vice president for policy
at the Center on Executive Compensation, a Washington-based organization
that represents senior human resources executives at some of the largest
“The board should be in
the position of having responsibility and accountability” for making
compensation decisions,” he said.
“The more you have change
in the roles of what shareholders do, versus what the board does, the
risk is you're eroding corporate structure,” Mr. Tharp added.
Allowing shareholders to
vote on compensation may encourage boards to abdicate their
responsibility to make decisions about executive pay packages and
instead turn to outside consultants, said Timothy Bartl, vice president
and general counsel of the Center on Executive Compensation.
That could force directors
to take a cookie-cutter approach to setting compensation rather than
adopting policies that are best suited to their particular companies, he
Council of Institutional Investors, which represents pension funds and
other big investors, supports the say-on-pay proposal.
Say-on-pay votes would
make company directors more accountable, said Amy Borrus, deputy
director of the Council of Institutional Investors.
“The point isn't to vote
down executive compensation plans,” she said. “The point of advisory
votes is to spur dialogue between investors and boards, and to make
boards more thoughtful about how they structure compensation plans.”
compensation experts think that say-on-pay is likely to prevail.
“To me, that's a done
deal,” said Susan O'Donnell, managing director in the Southborough,
Mass., office of New York executive compensation consulting firm Pearl
Meyer & Partners LLC.
Now that companies
receiving Troubled Asset Relief Program funds are required to allow
say-on-pay votes, it is only a matter of time before the requirement is
expanded to include all public companies, she said.
“Nobody's going to escape
this,” Ms. O'Donnell said.
On June 10, the Obama
administration nixed a previously announced $500,000 salary cap for
executives at firms receiving significant amounts of money from TARP and
appointed a pay czar to review, reject and set pay levels.
Treasury Secretary Timothy
Geithner also released much-anticipated guidelines that clarified
executive compensation rules passed by Congress in February as part of
the stimulus bill.
Two days later, the Center
for Executive Compensation released its own set of best practice
guidelines, the “Resource Guide on Executive Compensation Policy.”
In that report, the Center
for Executive Compensation said that annual salary and bonus payments to
executives should be balanced with such long-term incentives as stock or
In the total mix of
compensation, annual salary and bonuses should be less than the
long-term incentives paid to that executive, Mr. Tharp said.
“If you look at some of
the compensation arrangements that are viewed as overly risky, they are
too focused on the annual incentive without a balance on long-term
sustained performance,” he added.
Executives should also be
re-quired to retain a portion of the stock that they receive, and all
pay packages should include a so-called clawback that would require
executives to return compensation if the performance of a company is
re-stated downward, according to the report from the Center for
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