A Look Beyond the Dinner Bill
Imagine this: You have just finished a delightful dinner with friends. The meal was superb, and the bill is split evenly. Then, the restaurant owner approaches, eager to share the intricate details of how the waiter will be compensated. What if you had reservations about the waiter’s service? What if the owner presented the waiter’s annual salary, rather than a transparent hourly rate? Would you feel your opinion mattered? What if, collectively, your group voted against the waiter’s pay? The owner, a bit flustered, acknowledges your vote. But does it profoundly change anything?
This scenario mirrors the complex reality faced by shareholders under Say-on-Pay laws. Fifteen years after the Dodd-Frank Act brought this landmark executive compensation transparency law into effect, it is time to delve deeper into its impact.
The Say on Pay Landscape: A Tapestry of Studies
The effectiveness of Say-on-Pay has been the subject of extensive research, yielding a variety of perspectives. Some studies adopt a quantitative lens, while others favor a qualitative approach. Some argue that Say-on-Pay votes act as a powerful governance tool, while others focus on the impact on company performance or the timing of these votes. However, a common thread emerges: a positive, yet nuanced, view of the laws.
The Power of Perception: John W. Barry’s Findings
Professor John W. Barry of Rice University contends that Say-on-Pay laws have demonstrably influenced executive compensation. He argues that shareholders can exert pressure on boards through “no” votes. Even though these votes are advisory, their mere perception can incentivize boards to align executive pay with organizational performance. Barry’s research suggests that Say-on-Pay correlates with a 6.6% reduction in executive compensation and a 2% increase in firm value. He posits that if these votes were binding, CEO compensation might rise, as seen in the UK and Switzerland. The non-binding nature of Say-on-Pay encourages dialogue between shareholders and boards, fostering a culture of accountability without the drastic consequences of binding votes. https://tinyurl.com/Columbia-Law
Procedural Shifts: The Stanford Perspective
A study from Stanford University presents a different angle, suggesting that Say-on-Pay primarily drives procedural changes rather than substantial reductions in compensation. The study highlights the significant role of proxy advisors, such as ISS, in shaping these outcomes. While “no” votes do prompt responsiveness, they have not led to widespread pay cuts. The researchers analyzing Say-on-Pay votes across Russell 3000 companies, found that over 90% received shareholder support for executive compensation. Companies facing “no” votes typically implemented around 2.5 changes to pay packages, focusing on special equity awards or performance-based incentives rather than base pay. These changes often align with the guidance of proxy advisors, resulting in pay levels remaining elevated relative to peers. The study raises questions about the causality between proxy advisor involvement and executive pay, while acknowledging that procedural changes may face fewer hurdles than fundamental shifts in compensation. Failed Say on Pay: How Do Companies Course Correct after a ‘No’ Vote?
The Nuances of Impact: A Balanced View
These diverse perspectives highlight the complex outcomes of Say-on-Pay laws. While the laws may have tempered CEO pay growth and contributed to increased company value, the structural dynamics at play suggest that changes are often focused on pay package design rather than overall compensation levels. Nevertheless, Say-on-Pay has empowered shareholders with a voice, albeit advisory, in executive compensation matters.
Aligning Compensation with Strategy: The Enduring Message
Fifteen years later, Wilson Group’s original message remains relevant: the importance of aligning compensation plans with the organization’s total compensation philosophy, people strategy, and business objectives. As you consider the complexities of Say-on-Pay, remember that a well-structured compensation plan should serve as a strategic tool, driving both performance and alignment.
