July 15, 2008
European Union: The Debate over Executive Pay
We just had our monthly call among global benefits attorneys, and I heard that the European Union is hotly debating the regulation of executive compensation. Apparently, the impetus comes from the financial services sector, in response to the subprime meltdown. In the U.S., executive pay seems more broadly in the public crosshairs – with the legislative proposals focused on public companies (in the form of non-binding “Say on Pay” votes by shareholders to approve or disapprove of disclosed executive compensation), and on private companies (regarding the timing of taxation for equity-based compensation provided through private equity, aka hedge funds).
Although an election year would not seem likely to bring consensus for any law, I would not be surprised to see traction for ones such as these that ostensibly clamp down on executive pay. We saw this in 2004 when IRC Section 409A passed . . . in part because it was politically incorrect to defend executive pay. The question should be: will the U.S. be better off in the long-term if the legislation being proposed winds up passing?
“Say on pay” strikes me as warranting broad-based opposition from corporate America, if only to avoid the slippery slope of having shareholders vote on any front page issue of the day. Executive pay may be the cause celebre this year, but next year it could be outsourcing or right-sizing, or any number of emotion-laden issues. Boards of directors are elected to decide these hard issues, and it seems to me that full disclosure ought to suffice to enable shareholders to voice and express there interests. Say on pay is mere opportunistic piling on, in my view. As a result, if the legislation gets momentum, I’d hope voices of reason emerge to objectively assess its implications.
– Mark Poerio, Paul Hastings