August 5, 2008
The paper is well
written and provides a well laid out discussion of the “Say on Pay” issue.
I think that Professor Gordon has made a significant contribution in
explaining why Say on Pay in the U.S. would enhance the power of proxy
advisors (when they already have too much power – my emphasis).
Another important contribution is whether Say on Pay has worked in the U.K.,
although there is a need for more empirical analysis on this.
One issue that has not
been discussed is how to effectively voice displeasure over compensation
when the firm has a staggered board. In any given year, if no member of the
compensation committee is up for election, there would be no opportunity to
withhold a vote(s). With Say on Pay, this would not be an issue.
I have some specific
comments, some of which are meant to raise questions. However, I don’t
think that it would be useful to get into a debate about them at this point:
FTN 9 – Not clear yet
just how much corporate governance changes have undercut the ability of the
CEO to dominate the board selection proxy - we need more evidence on this.
Pg. 5 – Good point about
what it is that we are trying to reward when we say “pay for performance.” I
think that stock price and profits (properly defined) are both important. I
don’t think that any good comp system should just look at past profits, or
short term stock performance. In my opinion, the rewarded for performance
should based both on a long term basis and should be appropriately indexed.
Pg. 6. – Really good
point the boards pick consultants based on their “style.”
Pg. 13, last paragraph –
The idea that “stock prices measure expectations of future earnings, which
relate to new investment,” implicitly assumes that markets are efficient.
In the long-run, this is most likely to be true, but need to point this out
in some way. This is why looking at ROA over time, properly defined, is
Pg. 15, paragraph 2 –
Excellent point that “The system (UK) as a whole seems to tilt toward stasis
rather than innovation in compensation practice.” Clearly, if this is the
case, we don’t want to do this in the
Pg. 18 – Interesting
point is raised about success of governance with private equity firms vs.
that of public firms. One could also look at the literature on optimal
levels of insider ownership and performance for publicly traded firms.
Leonard Rosenthal, Ph.D.
Professor of Finance