Has “Say on Pay” Been Successful in the U.S.A?
“Say on Pay” (SOP) has been a visible way for shareholders and the government to reduce the growing salaries of CEO’s, by allowing a vote on their remuneration. Critics have argued that such laws will do very little except take power away from the Board of Directors and make it more difficult to retain CEO’s with expertise. This paper tries to refute these claims and argues that the not so perfect SOPs have met some of the needs of shareholders who want to vote on CEO salaries. SOP legislation has resulted in better payment policies, better corporate governance of companies and better practices of the CEO.
SOP proposes legislation that would change corporate governance of companies. It would mean that shareholders have the right to vote on the remuneration of executives. It also aims to meet the public’s demands for accountability and transparency of executives pay. It prevents managers from investing in short term rather than long term gains. This problem is solved by letting remuneration policies be approved at annual stockholder meetings. Companies may also give shareholders greater say over nominating directors, inaccurate financial statements, and executive compensation rewarded for improved stock performance.
SOP has been successful in reducing the remuneration of CEOs because shareholders have revolted against their CEO’s pay increases on numerous occasions. For example, 75 percent of Chipotle Mexican Grill shareholders voted against a proposed pay package for co-CEOs Steve Ells and Montgomery Moran. Ells earned $25.1 million in 2013 while Moran earned $24.3 million, a 27 percent rise in compensation for each. Chipotle spent $49.5 million on CEO pay last year, the fourth highest in the S&P 500. (Sweet, Ken 1). Critics and many CEO’s argue that the values of companies cannot be successfully managed without the expertise of a CEO. The best and brightest managers can lead a company in a more profitable direction. For example, Steve Jobs rescued Apple after leaving in 1997, when it was near bankruptcy. It turned into one of the most valuable companies ever. However, not all CEO’s are found to be so successful, and the financial research firm Obermatt recently compared the compensation of CEO’s at publicly traded firms and their professional performance and found no correlation between the two. (Davidson, Adam 1). It is also very difficult for CEO’s to justify the massive amounts they make compared to the average American worker. A chief executive now makes about 257 times the average worker’s salary, up sharply from 181 times in 2009. (Sweet, Ken 1). The government has found it difficult to justify this excess in an environment of unemployment, low wages, recession and corporate hand outs. SOPs have attempted to respond to the public and government’s demands with mixed success.
A sporadic revolt of shareholders has made some difference to the salary issue however it is still a drop in the ocean as the CEO and the Board of Directors of companies has adjusted to regulatory reforms. Part of the difficulty of making SOP successful is also trying to make stock bonuses, options, and perquisites transparent to shareholders. An informed decision is difficult to make about large increases in remuneration until this information is known by shareholders. In many cases, restricted shares are still allowed to be sold on the market and can still be unloaded quickly, and many CEO’s have large amounts of these. (Bebchuk, Lucian 1) It doesn’t matter that the pay of the CEO is not supported by shareholders as long as the CEO can find a way for their stock and options to be sold at a profit. Perquisites are often not visible to the shareholder. For example, fees for first class commercial airline tickets cited in corporate proxies are not based on the actual cost of flying and maintaining jets. There is no way to account for the cost in a realistic way. (Straus, Gary 2)
Attempts to cap the salaries of CEO’s is also difficult because they are still allowed to have unlimited compensation as long as they disclose it and allow shareholders SOP votes on the firms pay policy. While a company is making a profit, shareholders have often been reluctant to vote against a CEO’s remuneration. In 2012, only 14 U.S. companies had shareholders vote down their executive pay packages, according to proxy adviser Glass Lewis. That compared with 56 companies in 2011. (Rexrode, Christina 2). It goes without saying that implementing SOP’s is fraught with difficulty however there are examples where the law is working in favour of the shareholder.
Johnson and Johnson received a SOP vote of 57 % in 2012. This low ranking was seen as unsatisfactory by the company; however by 2013 the vote had changed to 94%. It has provided its shareholders with an easy to read executive summary in its proxy. These changes included implementing a new long term incentive program with payouts depending on specific financial goals, clawback policies and share retention requirements (Farient 1).
The policies that companies like Johnson and Johnson have implemented not only protect the shareholder, but also make the performance of a CEO more transparent. It also makes certain that the product and service that the CEO is giving along with bonuses they have received does not harm the firm over a long period. SOPs may not have had the intended reaction of reducing the salaries of CEO’s due to their limited scope however SOPs have made companies much more aware of the need to disclose. Disclosure may include the remuneration of its CEOs and performance for pay incentives. SOP has forced companies to implement policies that stop CEOs walking away with large salaries after a company goes into receivership. Does this mean that SOPs changed the corporate governance of companies and are the rights and responsibilities of CEO’s now more transparent and ethical?
Academic research was conducted using a decade of data and research on SOP in the United States and the UK. None of the data or studies showed that SOP votes had much effect on reducing CEO compensation levels. However, it found that SOP did affect pay for performance and transparency. It was found that many boards sat down with investors in the lead up to votes, negotiating key policies such as severance contracts and equity grants. It was also found that almost all boards changed compensation contracts after negative votes.(Ferri, Fabrizio) This means large companies have not necessarily changed compensation for their CEOs (unless there is poor performance) but instead have made policies for compensation more transparent to shareholders .
It is not difficult to not acknowledge that there must be a change of CEO salaries due to the massive gap between the pay of average workers and CEOs. Furthermore, the argument that big remunerations exist because of expertise and performance can be easily refuted by research. The introduction of SOPs by the government has merit in an environment of recession and there is anecdotal evidence to suggest that some companies SOP has made an impact on the pay of CEOs. Ordinary shareholders now have the opportunity to vote on the remunerations however the votes are not binding so it is unlikely that they will be successful in the future. Furthermore the vote is used sparingly when companies are making a profit. It is also difficult for shareholders to know all of the benefits that CEOs are receiving as many are off the company’s records. There is evidence to suggest that SOP has been successful at changing the corporate governance of companies and the payment policies of executives. The intended public relations message of the government may have been to reduce the salaries of CEOs however the success lies in the changes to corporate governance. SOP is required and partially successful but will need constant monitoring and review if it is to be successful in the future.
Works Cited
Bebchuk, Lucian. "Pay Caps Debate: They Don't Go Far Enough" Wall Street Journal. 06 Feb. 2009: p. A.11. SIRS Issues Researcher.Web. 23 Oct. 2014.
Davidson, Adam. "Greed Is Good." New York Times Magazine. 02 Jun. 2013: 14. SIRS Issues Researcher. Web. 24 Oct. 2014.
Farient. "Success Stories: Say on Pay Turnaround." Farient. 11 July 2013. 24 October 2013. http://www.farient.com/2013/07/success-stories-say-on-pay-turnarounds/
Rexrode, Christina. "Median CEO Pay Rises to $9.7 Million in 2012." Buffalo News. 22 May 2013: n.p. SIRS Issues Researcher. Web. 24 Oct. 2014.
Strauss, Gary, Barbara Hansen, and Matt Krantz. "Millions by Millions, CEO Pay Goes Up Again." Gannett News Service. 03 Apr. 2014: n.p. SIRS Issues Researcher. Web. 23 Oct. 2014.
Sweet, Ken. "Median CEO Pay Crosses $10 Million in 2013." Ithaca Journal. 27 May 2014: n.p. SIRS Issues Researcher. Web. 23 Oct. 2014.
Fabrizio, Ferri. “Say on Pay”. Columbia Business School. 30 March 2014. 24 October 2014
https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/6289/SOPCHAPTERMarch30_2014.pdf
