Say What? The Battle over Executive Comp

Big investors and compensation consultants, both with much to gain and lose, dig in and defend their ground over "Say on Pay."

A Slippery Slope

On the negative side of the issue are the compensation consultants — even though most claim that if Say on Pay were widespread, it would produce more business for them as companies strived to make sure their pay packages would pass shareholder muster.

“Say on Pay isn’t the only thing that is really stupid that generates business for me,” said Alan Johnson, managing director of Johnson Associates in New York, a consulting firm. “For example, there’s IRS 162M, which hasn’t done one scintilla of good for the economy or shareholders or anyone else, but has generated untold fees for consultants and lawyers.”

The Corporate Library’s Hodgson reacted with skepticism to the idea that Say on Pay will produce business for consultants, and he suggested a basis for their steadfast opposition to Say on Pay. “I think some of them are concerned about the exposure of their advice that it might lead to,” he said. “If you’re a consultant who has designed a pay policy that received a ‘no’ vote from a company’s shareholders, that isn’t going to look great on your résumé.”

There’s also the suggestion that Say on Pay might expose a fundamental conflict of interest that consultants may face in serving their corporate clients. The conflict, some say, is that the consultants structure pay packages that enrich executives who are in a position to use other services the consultants provide, such as employee-benefits and risk-management services. That issue has been the focus of a House of Representatives probe.

That doesn’t mean, though, that the consultants don’t have some plausible arguments to make against Say on Pay. Indeed, Elson of the University of Delaware finds himself in their camp on some of the issues, despite his belief that they have in fact played a role in driving up executive compensation.

One such issue: The shareholders, after all, own the company, so why shouldn’t they play a role in determining compensation?

“If you believe that, then why don’t they vote on the capital budget?” said Johnson. “That’s way bigger and more important. Companies can spend billions of dollars, but now we’re going to have shareholders vote on what kind of perks CEOs should have?”

Elson agreed. “It’s a slippery slope when you think about going from pay to other issues,” he said, and added that adopting Say on Pay sets a dangerous precedent. “It diminishes the board’s authority, which is problematic, because only a strong board can hold management accountable to investors. And you need that oversight, because the shareholdership is too large to have a Vermont-style town meeting to run the company. It’s the same reason we have a Congress.”

But Hye-Won Choi, head of corporate governance for TIAA-CREF, insisted that compensation is the critical issue. “It’s the most important responsibility of boards, and probably the most difficult to get right, because it involves sensitive issues,” she said. “It reflects on the overall quality of governance of the company. We think that if the board can get compensation right, it probably can do everything else right as well.”


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