'Say-on-pay' movement could get a boost in D.C.
Proposals aimed at giving stockholders a non-binding vote on executive compensation have failed to win widespread support. Shareholders in Abbott Laboratories of North Chicago, for instance, rejected a "say-on-pay" proposal in April. But many experts in the field expect the federal government to make say-on-pay mandatory for public companies, possibly by the 2010 proxy season.
The government already requires companies that receive federal aid to give shareholders an advisory vote on pay practices. A few companies have adopted say-on-pay on their own. More are discussing the idea.
Say-on-pay resolutions have been in place in Britain and Australia for years, and governance experts say the policy has led to better pay practices. But some question how meaningful a straight up-or-down vote can be.
Advocates say it will lead to greater transparency.
"Say-on-pay puts a lot more leverage into shareholders' hands," says Michael Kessner, a principal in the Chicago office of Deloitte Consulting LLP. "If you don't like what's being done, it sends a signal to directors that you're unhappy and you want to see progress."
The downside, some say, is that there is no outlet for shareholders to specify exactly what it is they don't like. And some experts worry that shareholders will vote on emotion rather than analyze hundreds of proxy statements in a short period of time.
"Shareholders will tend to vote (on pay issues) based on share price and, to me, that's the worst possible way to do it," says Frederick Lipman, co-author of the book "Executive Compensation Best Practices" and a senior partner with law firm Blank Rome LLP in Philadelphia. "A company can be doing well and share prices can be down for other reasons. What we need is a braver board of directors."
But most pay experts agree that compensation committee members don't want to face a big "no" vote. Says Mr. Kessner: "It's embarrassing, and they don't want to have to defend compensation practices that are hard to defend."