Say, say, say on pay: Doing more harm than good?


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Expert Perspective from Grahall’s OmniMedia Editorial Board
As Eleanor Bloxham writes in her May 25, 2010 article published in CNN (Say on Pay: 4 ways to defend executive pay under the new law): “The new finance reform bill is set to become law and say on pay, an advisory vote on compensation for shareholders, is a centerpiece of the reform. Few boards and companies, or investors, are ready for what that means…  with “say on pay”, the stakes have been raised for boards to explain in clear, credible English why the pay packages they propose should be adopted.”

Bloxham endorses say on pay:  “Companies… have offered “kitchen sink” defenses, as to why their pay plans are too different, too specialized, too standardized or too complicated for shareholders to properly understand and evaluate. But Congress has totally upended the board-shareholder power structure: companies are going to have to defend their own words and statements to shareholders this year, at the risk of eating them. So, let the votes begin.”

Grahall 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 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, transfers 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 a gut reaction.”

Essentially if one believes in the merits of our corporate governance system, then say on pay should not be needed, since the board should be able to do a better, more informed job than the populace.  But if you are of the mind that the “system is broken,” then say on pay could be used to impose a discipline to do what appears to be “right” (assuming that is lowering executive pay).  Requiring that Boards fully explain executive compensation and subjecting their decisions to advisory votes is great in theory but unfortunately creates an incentive to “dumb things down.”  It encourages companies to use standardized, easily communicated and justified approaches to executive pay regardless of the business strategy or circumstance.   Some of these standardized approaches (such as heavy reliance on benchmarking data) are, in part, what escalated executive pay in the first place. (Read more in our blog Of Peers and Paradoxes.)

As we said on our blog Multi-Dimensional Executive Compensation “Certainly benchmarking is and should be a tool in the toolkit that boards and consultants use to help set CEO pay. But Grahall sees it not as the only or even the primary tool in determining CEO pay.  Benchmarking only addresses “money”, it misses the very important aspects of the “mix” of rewards and the “messages” those rewards are sending.”

As we shared in our blog Creating Quality Compensation, when structured properly – as opposed to simply – compensation programs can contribute to achieving and accelerating a company’s business strategy and profits, and therefore shareholder value.  However, to deliver those results demands a complex process.  It requires a thorough examination of the external environment (government, customer, shareholder, employees, etc).  Following that, a company must revisit, renew and refresh its Vision, Mission and Value statements, examine and understand its business strategy, and then align executive rewards programs with these strategies.  And that is just the start of the effort to get it “right” and truly design a compensation program that will drive necessary behaviors to help a company to reach its business goals and deliver high levels of shareholder value.

No doubt in some companies, maybe even many companies, Boards could do a better job of connecting executive pay, and especially CEO pay, to the business strategy, performance criteria and shareholder value.  But “standardizing” executive pay is no way to ensure improved shareholder value.  

We are all for improved transparent and clear communications of executive pay policies and strategies.  That will benefit shareholders.  However, we also believe that the corporate governance system is NOT broken in most companies and that say on pay will NOT improve shareholder value.

Grahall hopes that Boards do not shy away from their responsibilities. They should 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 commitment, any effort to “fix” the corporate governance process and executive pay by empowering shareholders will fail.

Contact Grahall’s OmniMedia Editorial Board at

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