It‘s Not an Easy Fix


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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeZach Carter’s article Shareholders Alone Can’t Correct ‘Too Big to Fail’  in the November 23, 2009 issue of The Nation got our Editorial Board talking about “say on pay” and shareholders rights.  Mr. Carter says: “It’s easy to see why empowering shareholders to deal with bloated CEO pay might be attractive. We’ve just watched several regulators, from the SEC to the Office of Thrift Suspension to the Federal Reserve, fall down on the job–maybe shareholders who want to see a good return on their investment will exercise more prudence.”
Although Mr. Carter didn’t specifically address “say on pay” in his article, it is thought to be one approach that could possibly empower shareholders to “control” pay. 

Let’s take a closer look at say on pay and how it might play out, for better or worse.  

 “Say on pay” proposals are all structured as “non-binding,” making these just advisory votes by shareholders, which would not necessarily dictate any action by the Board.  The “nonbinding” aspect of these votes might be “good news” for a couple of reasons.

First, the “say on pay” vote won’t be detailed enough to provide boards with any really actionable steps to take.  A simple “no” vote on pay only suggests that pay is too high, not how high it is. And for that matter a “yes” vote simply says the pay is not “too high” rather than endorsing any of the specifics of the compensation structure.   Compensation for executives is and should be complex., but not so complicated as to be unexplainable or unsupportable.  Rather, the compensation structures should include a wide variety of pay components: base pay; short-, medium-, long- and career-term incentives tied to specific business goals; executive benefits; and perquisites.  The combination of these components and the messages they send are key to designing programs that link compensation to the business strategies.  

Second, because of the complexity of these compensation structures, it is possible that shareholders won’t understand the underlying linkages and will react to compensation based on a number alone that appears on the surface to be either ‘reasonable’ or ‘unreasonable’.   If the shareholders don’t fully understand the reasoning behind the compensation structure they can’t make an informed decision on the outcome. Voting down a well thought out compensation structure that on its surface “appears” to be too large would not benefit the company or the shareholders, while voting up a compensation structure that on its surface appears reasonable, but which is not well structured to drive business results, wouldn’t benefit the company or its shareholders either.

And let’s not forget the obvious – if neither the executive nor the employer understands the compensation structure, then don’t expect the board or shareholders to understand either.  In that instance, you’ve got an even bigger problem.

A positive outcome of “say on pay” will be, we hope, renewed interest and effort by Boards and management to open a rich dialogue with shareholders about business practices and how compensation can help to drive the business strategy.  For far too long now, there has been little discourse between Boards and shareholders about how the business plan is linked to the rewards strategy.   In the absence of this dialogue, institutional shareholders can and will (as they have done in the past) look to ISS Governance Services (a business unit of Risk Metrics, Inc) for advice on how to vote.

For all ISS Governance Services’ claim to provide “… complete analysis with deep insight on each ballot issue”, ISS Governance Services is essentially a “black box” that is an inflexible model where data on more than 10,000 US companies must be “normalized” in order to provide consistent recommendations.  The nuances (which Grahall believes must be considered in order to create appropriate compensation structures) are averaged out or simply ignored.  As you might, imagine we don’t see this as a positive outcome. 

It is possible that “say on pay” votes, even though non-binding,  could become the equivalent of a “bleeding edge” endorsement or indictment of Board governance and fiduciary duty, effectively becoming  binding in their application and ability to control executive pay.   Boards with “yes” votes get a “rubber stamp” on their decision and Boards with “no” votes could possibly risk civil suits if they take no action.  In the end, making “say on pay” a defacto binding  vote, transferring these decisions from an informed group (i.e., the Board) who (we would hope) has made decisions based on solid data, business strategy and sound philosophy to an uniformed group (i.e. shareholders) who made decisions based on imperfect data or based on a “gut reaction” 

So how will Boards react? Trapped between the challenge of educating shareholders and the growing authority of ISS Governance Services, the easiest thing for Boards to do is to become less thoughtful in their compensation decisions and simply set executive pay in the high end of whatever ISS determines to be the “approved envelope” even if this is not the “right” level of pay for the executive.

We hope that Boards do not shy away from their responsibilities and continue to invest time and effort to connect executive compensation to business strategies and then take the additional steps to thoroughly communicate their decisions and how those decisions were made to shareholders prior to the proxy vote.  Without this any effort to “fix” the corporate governance process and executive pay by empowering shareholders will fail.

Contact Grahall’s Editorial Board at

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  • [...] has written many blogs on say on pay.  Last December we wrote in our blog It’s Not an Easy Fix that “It is possible that ‘say on pay’ votes, even though non-binding,  could become the [...]

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