The Advisors' Blog

Okay, so after reading Frank Glassner’s blog that tells me, contrary to everything I learned in school, that you can take it with you, and highlights pay excesses that are guaranteed to make some shareholders’ a bit crazed about executive pay, allow me to weigh in on whether it’s a great idea to allow shareholders to have a direct “say-on-pay” for public company executives.

I say that, despite some of the excesses that are out there—including compensation continuing beyond the grave—Frank’s blog may indicate why “say-on-pay” is unnecessary.

Current Status of Say-on-Pay

First, what’s going on with “say-on-pay”? Is it the NEXT BIG THING or just a passing fancy? According to Brian Foley, managing director of Brian T. Foley & Co., White Plains, NY, who spoke at the recent ALI-ABA Executive Compensation Conference in NY last month, not only is it not a passing fancy it’s likely to become law.

Both major party candidates, Senators McCain and Obama, have come out publicly in favor of “say-on-pay” votes by shareholders. Obama sponsored S. 1181, a counterpart bill to Rep. Barney Frank’s (D-Mass) H.R. 1257, which mandates a non-binding, advisory vote on executive pay packages.

On June 10th, Senator McCain decried the “extravagant” pay and severance arrangements offered to executives and promised to force companies to seek shareholder approval of their executive-pay plans. “Under my reforms,” he is reported to have told a small business group, “all aspects of a CEO’s pay, including any severance arrangements, must be approved by shareholders.”

Will this become law or is it just great sound-bites for the campaign trail? Who knows. I for one have long since given up handicapping anything in D.C. The odds aren’t there.

Analyzing “Say-on-Pay”

The more important question, it seems to me, is whether say-on-pay is necessary or even a good idea? I say “no” on both counts.

Is say-on-pay necessary? Read Frank Glassner’s blog. One take away from his blog is something we all know: compensation is becoming much more transparent. Everyone is reading these proxies and openly criticizing the more egregious practices. This may be viewed as a good thing and shows that the new rules appear to be serving their stated purpose.

And shareholders of public companies already have a say-on-pay in a number of significant ways. First, all major exchanges require shareholder votes for equity plans (where most of the real money is) and any significant changes to those plans. Code Sections 422 and 162(m) require shareholder approval of plans that grant incentive stock options or may pay certain officers of public companies over a $1M annually, respectively.

Third, and most importantly, Shareholders can “vote the rascals out” if they think their directors are paving the streets with gold.

Sophisticated shareholders can and should read carefully the information required in the company’s proxy statement as part of the Compensation Discussion and Analysis. This will give them the fully story on compensation, including, of course, big pay packages that executives can figuratively take to the grave.

Just as importantly but often overlooked: if they read the CD&A thoughtfully, they will discern the arduous process employed by thoughtful compensation committee members as they attempt to figure out the “right” amount to pay their executives. While its currently in vogue for some shareholders and advisory groups to claim that compensation committee members are not doing their jobs, as a veteran of many compensation committee meetings, I can report that nothing is further from the truth. Shareholders who read the CD&A should question the wisdom of replacing the thoughtful process engaged in by committed individuals with the democratic process.

While some proponents of say-on-pay call voting directors out the “nuclear option” it is a very real option and not at all “nuclear.” What’s nuclear about exercising your voting right as a shareholder?

Besides being unnecessary, it’s not even a very a good idea. Say-on-pay—even the non-binding variety most often touted by proponents and approved by Apple and others – can not be in the long-term interest of successful public companies.

Not a Good Idea – and Not in Long-Term Interests of Shareholders

Why? Because it seriously blurs the line between those who are charged with running a company and those who are investors. A profit-making enterprise is not a direct democracy and treating it like one will set us off on a ridiculous downward slope. If “say-on-pay” initiatives pass, what’s next?

– “Say-on-way,” in which shareholders provide advisory votes on capital budgets and strategic planning?

– “Say-on-stay,” in which shareholders hold a referendum on who is to be hired and fired? Brilliant. Perhaps then candidates for positions in public companies will run campaigns for their positions. Position statements can be prepared. Polling can be done. Debates between leading candidates for CEO can be held. Professionally prepared commercials can be streamed to desk-tops of shareholders around the globe, ending with the would-be-CEO asserting that he is “Bill Carsonand he approves this message.” Imagine the ruckus when a minor (not leading candidate) demands his right to openly debate for the position of CEO of General Motors or Exxon.

Proponents on say-on-pay want to ignore the slippery slope argument, but offer no real response as to how say-on-pay is any different than having a direct, advisory say on any other aspect of the operation of a public company.

This blurring of the lines between shareholders and the boards they elect will not lead to better run companies–it will lead to companies that better run.

– Peter Marathas, Partner, Proskauer Rose (Boston)