The US has recently proposed new legislation that would provide shareholders with a vote on top executive compensation in all public companies. While I am in full agreement with the idea of change and better oversight by the stakeholders of an organization, I do have a few concerns with this proposal.
The “say on pay” proposal comes as a result of the perceived excessive compensation that CEOs and other senior executives have received in spite of often times poor company performance. It is also designed to align executive compensation with the long-term success of the organization thereby curtailing the short-term risk taking that certain compensation structures seem to promote. But here’s the hitch, shareholder voting, according to the proposed legislation is non-binding. So in fact, the board of directors will still have the final say on executive pay.
The thinking is that if shareholders object to certain pay practices they will be able to voice their opinions and the board will take this into account when making their final decision. It is hoped that this will in turn lead to better communication and interaction between a company and its shareholders.
The question that needs to be asked however is why try to impose these types of controls on existing boards of directors? Why not simply look at board composition and improve who is actually sitting on the board and ultimately making these decisions?
This legislation does not go to the heart of the matter, which is actually the composition and homogeneity of boards that ultimately precedes these problematic compensation decisions. Companies need boards that consist of a variety of individuals who are independent in their thinking and not afraid to question the status quo. The tendency towards group-think must be addressed and directors must be motivated and free to ask difficult questions and dissent if necessary.
If shareholders were to have faith in the boards of the companies in which they invest “say on pay" would be somewhat of a moot point.