Shareholders of Verizon Communications recently passed a measure that would give them an advisory vote on compensation packages for top executives. Shareholders at roughly 20 companies have pushed such say-on-pay proposals. And Congress appears ready to act if companies don’t. The House of Representatives has passed a bill that would give nonbinding votes on pay to all shareholders, like those that Britain and Australia already have.
The board of directors at Verizon could ignore the vote if it chose to; shareholders elect board members to make policy, after all. But they would be wise to listen. Ignoring this message would likely give impetus to the legislation in Congress, which is not the place to set corporate salaries, or prompt shareholders to return with a binding proposal. And at a growing number of companies where directors need a majority of votes to remain on the board, there is always the risk of being shown the door.
Many factors are driving compensation upward, including the frantic hunt for talent accelerated by increasingly rapid turnover of chief executives. Most investors are less concerned with absolute pay levels than the sense that raises, bonuses and stock grants arrive as a matter of course rather than as a reward for success.
The real value of say-on-pay is not to slash executive salaries as a matter of principle, but to force corporate boards and their compensation committees to better explain their decisions. That explanation should include the extent of financial relationships with the consultants making recommendations on executive pay.
The post-Enron reforms forced boards to eliminate
conflicts of interest among auditors, investment bankers and others. But
little was done to address conflicts of interest among pay consultants who
may have other lucrative contracts with the same companies — and strong
incentives to please the top executives. Those conflicts of interest fuel
the irrational rise in compensation — and the growing discontent among
investors.