Critics: “Say on Pay” Spurs Brain Drain

Opponents wonder if a Barney Frank bill that would enable shareholders to opine on executive pay could push CFOs and their bosses at publicly held companies into the private-equity sphere.

Critics of a House of Representatives bill that would give shareholders an advisory vote on executives’ pay packages say the legislation could encourage public company finance chiefs and their bosses to take jobs at private equity–owned firms.

In privately held firms, CFOs and chief executives could face less scrutiny and be paid more, opponents of the measure say. “One of the unintended consequences of this bill is you will be driving CEOs and CFOs — generally the better ones — into private equity,” says Steven Kaplan, a finance professor at the University of Chicago’s Graduate School of Business.

During Thursday’s Financial Services Committee hearing on the so-called say on pay issue, Kaplan cited former GE vice chairman David Calhoun as an example. Last year Calhoun left his high-profile job for a reported $100 million pay package at VNU, a media company that had recently been privatized.

Allowing shareholders to give an advisory opinion on top executives’ pay packages has become a hot-button topic this year as the number of proxy votes pushing the issue has increased. Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee, considers it one of his top priorities.

Further, insurance company Aflac recently announced that it would approve a say on pay proposal — thus winning glowing reviews from institutional investors. Opponents of expanded shareholder rights worry that the bill would give too much leeway to uninformed investors. Such investors could move to unduly decrease salaries out of envy, for example, the critics say.

Proponents, however, argue that the measure could lead to underpaid executives getting better, and more appropriate, compensation. While say on pay votes are nonbinding, a company would be hard-pressed to ignore a “no” vote from shareholders and risk public criticism.

Losing strong executive performers in the public markets was one of a number of caveats to Frank’s bill mentioned at the hearing. Kaplan also said the costs associated with implementing such legislation would outweigh any benefits, although he could not estimate in dollars how much it would cost beyond the extra time needed for directors and shareholders to discuss the issue.

Opposing government mandates on executive pay, Republicans said during the heated debate that executives had recommended that Congress take a wait-and-see approach to the effect of the Securities and Exchange Commission’s expanded compensation-disclosure rules, which have been in place for only a few months. They also think that more companies like Aflac should adopt similar measures.

At the same time, other boards may be forced to tip their hat to shareholder demands and allow advisory votes. The SEC, for instance, recently denied AT&T’s request to omit a resolution giving shareholders the right to opine on pay.

Frank, who introduced a similar bill last year that failed to get past the committee stage, insisted that his current bill is simple and focused. The sole purpose of the three-page measure, he said, is to give shareholders the right to voice their concerns about executive pay packages.

The bill would also allow a nonbinding shareholder vote on golden parachutes, which boards provide when an executive leaves a company because of a merger or acquisition. “This is about giving the owners of the company — the shareholders — a simple say on the pay of the people who work for them,” said Rep. David Scott (D-Ga.).

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