Say on Pay Revisited

Many critics of CEO pay dispute that the problem lies, not with the size of the pay packets but with the incentives that they create. The obscene options are meaningless unless the company's shares hit a certain price, but staggeringly profitable if they exceed it. Therefore, considerable risks to boost share prices in the short term and then cash out are taken. This is the simple scenario the board and stakeholders should consider: pay the bosses in restricted shares, which they must hold for a specified period rather than choosing when to sell. So when their bets go sour, it is not only the shareholders that suffer.

The idea that some corporate bosses are obscenely overpaid is present wisdom in the press. The New York Times complains of fat paychecks [awarded] to chief executives who, by many measures, do not deserve them. Forbes worried stakeholders by spreading the rumor that the CEO income is gravity-defying and devoted an issue on executive compensation.

Still board of directors and stakeholders do not do their homework but continue to be surprised when reports of lifelong pension schemes given to managers and directors of fallen companies hit the press.

First there is a need to fix this threat to all stakeholders:

1. The CEO pay does not just go up
2. It is tied to actual performance, and the boards must hold their paws to the fire
3. CEOs use their power to rig the system, when the time is ripe (right)
4. Ensure that an efficient succession laws and labor market for talent would produce different results.

Steven Kaplan of Chicago's Booth School of Business has gathered his research together in a new paper ("Executive Compensation and Corporate Governance in the US: Perceptions, Facts and Challenges").

His argument is well-grounded and intricate. He distinguishes, for example, between "estimated" and "realised" pay. Estimated pay is the estimated value of the CEO's pay, including stock options, when the board does the hiring. Realised pay is what the CEO actually makes when he exercises his options.

First let's consider the ten myths of "SAY ON PAY" and then go thru the shareholder responsibilities for different company clarification, before the damage is done.

1. THERE IS NOT JUST ONE APPROACH TO "SAY ON PAY".
   Make the effort and find your own unique 'one size does not fit all' approach.
2. Despite what many believe, there is no single policy for implementing "say on pay" that is uniformly adopted across countries.
3. ALL SHAREHOLDERS WANT THE RIGHT TO VOTE ON EXECUTIVE COMPENSATION
   A related myth is that markets respond favorably to a regulatory requirement for say on pay.
4. "SAY ON PAY" REDUCES EXECUTIVE COMPENSATION LEVELS
   Prior to the enactment of Dodd-Frank, advocates of say on pay also expected that shareholders would take advantage of a right to vote on executive compensation to register their general discontent and that this in turn would create pressure on boards of directors to reduce pay.
5. PAY PLANS ARE A FAILURE IF THEY DO NOT RECEIVE VERY HIGH SUPPORT
   Given the overall approval rates of say on pay, attention has shifted to the pay packages of companies that receive passing, but not overwhelming, support.
6. "SAY ON PAY" IMPROVES PAY FOR PERFORMANCE
   Critics of executive compensation contend that CEO pay is not sufficiently tied to performance.
7. PLAIN-VANILLA EQUITY AWARDS ARE NOT PERFORMANCE-BASED
   A similar myth in executive compensation is that restricted stock grants and stock options should not be considered "performance-based" incentives unless they contain performance hurdles in addition to time-based vesting criteria.
8. DISCRETIONARY BONUSES SHOULD NEVER BE ALLOWED
   Many governance experts also believe that the board of directors should not be allowed to use discretion in determining the size of an executive's bonus and that bonus calculations should be based strictly on whether the executive has achieved predetermined performance targets.
9. SHAREHOLDERS SHOULD REJECT NONSTANDARD BENEFITS
   Another myth in say on pay is that significant pay in the form of perquisites and benefits is "bad compensation," and that almost all compensation should come in the form of cash or equity.
10. BOARDS SHOULD ADJUST PAY PLANS TO SATISFY DISSATISFIED SHAREHOLDERS
    One of the reasons that shareholders delegate authority to a board of directors is that they do not and cannot have all of the information they need to make optimal decisions regarding a company's strategy and operations.
11. PROXY ADVISORY FIRM RECOMMENDATIONS FOR "SAY ON PAY" ARE CORRECT
    Proxy advisory firms rely on proprietary methodologies to develop their guidelines for say on pay.

Source: Professor David F. Larcker, Allan McCall, Gaizka Ormazabal, and Brian Tayan prepared this material as the basis for discussion
http://www.gsb.stanford.edu/sites/default/files/research/documents/CGRP26-Myths.Say_.on_.Pay_.pdf

Shareholder Say on Pay – Ten Points for individual company clarification

1. Should success be evaluated narrowly or with a broad systemic focus?
2. Should say on pay transfer power to shareholders or empower directors?
3. When can shareholders move toward company-specific analyses?
4. What conditions in a particular country differ enough, that shareholder and board need/not speak?
5. When are proxy-voting results reliable and when should they be ignored?
6. The contingency plan when shareholders destroy value or force boards to free serve it?
7. Why do shareholders need a rifle when they have cannon?
8. How to create a platform for shareholder communication for better understanding and listen to their concerns.
9. The annual assessment if say on pay results in loss of good CEOs or result in better succession planning?
10. Assess the conditions and scenarios for excessive compensation or pay without performance?
    
    Source: Shareholder Say on Pay – Ten Points of Confusion1
    By Keith L. Johnson & Daniel Summerfield
    http://blogs.law.harvard.edu/corpgov/files/2008/11/say-on-pay-ten-points.pdf
    
    TEN MYTHS OF "SAY ON PAY"
    


11. THERE IS NOT JUST ONE APPROACH TO "SAY ON PAY".
    Make the effort and find your own individual 'one size does not fit all' approach.
12. Despite what many believe, there is no single policy for implementing "say on pay" that is uniformly adopted across countries.
13. ALL SHAREHOLDERS WANT THE RIGHT TO VOTE ON EXECUTIVE COMPENSATION
    A related myth is that markets respond favorably to a regulatory requirement for say on pay.
14. "SAY ON PAY" REDUCES EXECUTIVE COMPENSATION LEVELS
    Prior to the enactment of Dodd-Frank, advocates of say on pay also expected that shareholders would take advantage of a right to vote on executive compensation to register their widespread dissatisfaction and that this in turn would create pressure on boards of directors to reduce pay.
15. PAY PLANS ARE A FAILURE IF THEY DO NOT RECEIVE VERY HIGH SUPPORT
    Given the general approval rates of say on pay, attention has shifted to the pay packages of companies that receive passing, but not overwhelming, support.
16. "SAY ON PAY" IMPROVES PAY FOR PERFORMANCE
    Critics of executive compensation contend that CEO pay is not sufficiently tied to performance.
17. PLAIN-VANILLA EQUITY AWARDS ARE NOT PERFORMANCE-BASED
    A similar myth in executive compensation is that restricted stock grants and stock options should not be considered "performance-based" incentives unless they contain performance hurdles in addition to time-based vesting criteria.
18. DISCRETIONARY BONUSES SHOULD NEVER BE ALLOWED
    Many governance experts also believe that the board of directors should not be allowed to use discretion in determining the size of an executive's bonus and that bonus calculations should be based strictly on whether the executive has achieved predetermined performance targets.
19. SHAREHOLDERS SHOULD REJECT NONSTANDARD BENEFITS
    Another myth in say on pay is that significant pay in the form of perquisites and benefits is "bad compensation," and that almost all compensation should come in the form of cash or equity.
20. BOARDS SHOULD ADJUST PAY PLANS TO SATISFY DISSATISFIED SHAREHOLDERS
    One of the reasons that shareholders delegate authority to a board of directors is that they do not and cannot have all of the information they need to make optimal decisions regarding a company's strategy and operations.
21. PROXY ADVISORY FIRM RECOMMENDATIONS FOR "SAY ON PAY" ARE CORRECT
    Proxy advisory firms rely on proprietary methodologies to develop their guidelines for say on pay.

Source: Professor David F. Larcker, Allan McCall, Gaizka Ormazabal, and Brian Tayan prepared this material as the basis for discussion
http://www.gsb.stanford.edu/sites/default/files/research/documents/CGRP26-Myths.Say_.on_.Pay_.pdf

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