The Advisors' Blog

– Broc Romanek

Here’s an excerpt from this blog – “Should Say-on-Pay Votes Be Binding?” – by two Canadians about the effectiveness of non-binding say-on-pay votes:

Some findings reveal disturbing and unintended consequences. For instance, studies suggest that shareholders base their votes on the performance of a company’s stock rather than on an analysis of the firm’s compensation policies and practices. If company shares do better than those of its peers, almost any compensation package will be approved. This perverse result tends to increase the pressure on management to focus on short-term stock performance, sometimes through decisions that may negatively affect future performance.

This is not surprising, though. It has become far harder to read and understand the particulars of executive compensation. Indeed, for the 50 largest (by market cap) companies on the Toronto Stock Exchange in 2015 that were also listed back in 2000, the median number of pages needed to describe their executives’ compensation rose from six in 2000 to 34 in 2015, with some compensation descriptions consuming as many as 66 pages. Investors holding shares in hundreds of different firms face a formidable task. The simplest approach is to vote according to the stock’s performance or, more likely, to rely on the recommendations of proxy advisory firms, which also base their “advice” in part on relative stock market performance.

Thus, 66 percent of corporate directors do not agree that say-on-pay resulted in a “right-sizing” of CEO compensation. Yet 83 percent of directors very much agree or somewhat agree that say-on-pay increased the influence of proxy advisors, according to a 2016 PwC and Cleary Gottlieb survey: Boards, shareholders, and executive pay.