In keeping with my policy of avoided too many heavy topics in the last two weeks, because of the year-end deadlines facing most of us, this Blog refers to an interesting Stanford Graduate School of Business article on the Ten Myths of "Say on Pay" (everyone likes top ten lists). According to this article, the Ten Myths are as follows:
- There is only one approach to "say on pay."
- All shareholders want the right to vote on executive compensation.
- Say on pay reduces executive compensation levels.
- Pay plans are a failure if they do not receive high shareholder support.
- Say on pay improves "pay for performance."
- Plain-vanilla equity awards are not performance-based.
- Discretionary bonuses should not be allowed.
- Shareholders should reject nonstandard benefits.
- Boards should adjust pay plans to satisfy dissatisfied shareholders.
- Proxy advisory firm recommendations for say on pay are correct.
Most of us who have been heavily engaged in this issue for the last several years tend to agree with these "myths." Some of the factors running through several of the "Ten Myths" are:
- Many shareholder say on pay votes FOR or AGAINST, are really votes in favor of or against the recent performance of the company's stock, rather than its compensation package. Regardless of whether their pay packages are sound, companies with lagging stock performance often receive significant AGAINST votes, while companies with good stock performance seldom receive any significant AGAINST votes.
- Not all shareholders are created equal. That is, some shareholders are more focused on political issues than stock price performance -- never mind their fiduciary duties. Think of publicity-seeking politicians who double as the trustees of government pension funds, certain union pension funds, and the UAW.
- Anyone who cannot grasp the fact that stock options are performance-based compensation ought to be disqualified from voting (or at least subject to mandatory drug testing).
However, I believe that most those of us at the forefront of executive compensation also would agree that this area was ripe for additional oversight and improvements. So, while the pendulum continues to swing back from the wild and crazy compensation days of 1998-2002, we will keep working our way through to a better outcome.