“Say-on-Pay” is Generally Toothless

February 1, 2011

Last week, the SEC passed a rule that it is selling as a “Say on Pay” for corporate executives.  The SEC says that:

Under the final rules, companies subject to the federal proxy rules are required to provide shareholders with an advisory vote on executive compensation. In particular, the rule amendments, which implement the Dodd-Frank Act, specify that these say-on-pay votes are required at least once every three years beginning with the first annual shareholders’ meeting taking place on or after January 21, 2011.

This SEC rule was passed in an attempt to strike a balance between shareholders’ growing concern about salaries and benefits for high-level executives.  In theory, the “advisory vote” on pay should get directors to recognize when shareholders are unhappy about the executive payroll, therefore allowing directors to keep their “fingers on the pulse” of shareholders.  

But, the “advisory vote” assumes that shareholders will take the directors’ actions into consideration when that board is up for reelection.  Realistically, shareholders will sell the security before they can make a real difference, or, forget about the issue by the time a particular board goes up again for election.

And, directors can give themselves cover for their decisions by coming up with a list of reasons as to why the executive is worth that amount, and simply ignore shareholders.

Overall, this rule well-intentioned, but toothless.


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