Fair or Foul?

Shareholders in America want more influence over bosses' pay.

Opponents of Croesus-like rewards for America’s top bosses got a boost from an unlikely source this week. In a speech on June 10th John McCain, the Republican presidential candidate, railed against the iniquities of “extravagant” pay and severance deals. And he promised to force companies to seek shareholder approval for their executive-pay schemes if he wins in November.

This delighted investors fighting for more say over bosses’ pay and perks. RiskMetrics, a consultancy, reckons 70 “say on pay” resolutions will be tabled in 2008 asking American firms to give investors non-binding votes on compensation plans, up from 52 in 2007. So far this year such motions have won majority support at seven firms, including Apple and Motorola. In May Aflac, a health insurer, became America’s first public company to hold a formal vote on its pay plan, which won 93% approval.

Peter Oppermann of Mercer, a consultancy, points out that most resolutions that seek to put in place such votes have been defeated, however. Critics argue, amongst other things, that simple yes-or-no decisions are no way to treat complex compensation matters, and that investors who are really unhappy with a proposed plan should just vote out the directors responsible for it.

Neither argument is convincing. Most institutional shareholders have the know-how to judge if plans are in their interest, or can hire outside experts to do so. They negotiate with companies over pay long before the company meeting—using the threat of defeat in a vote for leverage. And ousting otherwise competent directors, without warning, over pay seems extreme. Richard Ferlauto of the American Federation of State, County and Municipal Employees, one of the main proponents of say-on-pay votes, likens a negative vote to the yellow card that a referee shows an errant soccer player. The player knows that if he transgresses again he will be sent off. By the same token, a public warning may give directors the incentive they need to overhaul a firm’s pay policy.

If Mr McCain is elected and keeps his promise, boards will have no choice but to listen to shareholders on pay. His Democratic rival, Barack Obama, who has sponsored a bill in Congress that supports say-on-pay votes, may also take a tougher line if he wins. Voluntary action by companies to introduce say-on-pay votes could head off government intervention. Firms that resist may end up scoring an own goal.

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