'Say-on-Pay' Useful in Curbing Golden Parachutes

But Harvard research UK finds little change in CEO pay in UK.

Excerpts from Shareholders Need a Say on Pay

The U.S. House of Representatives in August passed a bill granting shareholders a non-binding vote on executive compensation and severance packages. It also maintains that compensation committees should be independent of management.

But given its non-binding status, does say on pay work to control executive compensation?

Say on pay has been a research focus of HBS assistant professor Fabrizio Ferri, who started his career at Stern Stewart & Co specializing in performance measurement and incentive compensation issues. In the paper “Say on Pay Vote and CEO Compensation: Evidence from the UK,” Ferri and coauthor David Maber (HBS DBA ‘09), assistant professor at University of Southern California, analyzed the provision, which has been available to United Kingdom shareholders since 2002.

Although Ferri and Maber found no indication of a change in levels of CEO pay after the adoption of say on pay in the UK, they did discover an increase in the sensitivity of CEO pay to poor performance and a reduction in severance packages. The effect was more pronounced in firms with high voting dissent, but was also observed more generally in organizations with excess CEO pay, suggesting that some companies acted in advance of the annual meeting to avoid a confrontation with shareholders.

These findings suggest that say-on-pay legislation can be a useful tool for shareholders to strengthen the link between CEO pay and performance when it comes to those much-maligned golden parachutes.

Comments

[mna:]

"non-binding vote on executive compensation and severance packages. It also maintains that compensation committees should be independent of management."

In other words, nothing's gonna change. Not like compensation committees aren't supposed to be independent now. The vote should be made binding.

They really should also consider letting only the long term shareholders vote on compensation. It would increases the say of shareholders who have the largest interest in the good of the company.

Nov 02 01:57 PM