2011•Scholorship Repository - Florida State University College of Law (Florida State University)Open access
Say-on-Pay: Cautionary Notes on the Use of Third Party Compensation Guidelines in the United States
Tiffany Roddenberry
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Abstract
Outrage over executive compensation practices has fueled calls to increase shareholder participation in the executive compensation process.Beginning January 20, 2011, the Dodd-Frank Act mandates shareholders receive nonbinding, advisory votes on the compensation of executives and any "golden parachutes" provided to executives. 1 However, the say-on-pay provisions of Dodd-Frank remain problematic, particularly in light of the United Kingdom's experience with similar provisions.Despite greater disclosure of executive compensation plans, many shareholders continue to lack the incentives and ability to accurately evaluate the information given to make an informed decision regarding whether executive pay is reasonable.The U.K.'s experience additionally generates a new concern: a third party certifier stepping into the say-on-pay process.In the U.K., two large institutional investors have put forth best practices guidelines for compensation, and shareholder approval hinges on whether the proposed plan complies with these guidelines.There is some concern that similar groups in the U.S. will take on the role of third party certifier with their own executive compensation guidelines.The risk with such guidelines is that power would vest in a select few groups that have incentives to collude with boards and/or have goals that do not maximize overall shareholder value.Two proposals may alleviate these concerns.The first would require disclosure of executive pay to comparable firm executives to give shareholders a sense of the "market value" of executive pay.The second would encourage the creation of best compensation principles that better encapsulate what reasonable executive compensation should be.With one of these proposals in place, shareholders may make better use of the say-on-pay provisions such that only truly excessive pay is targeted and corporations may still properly tailor executive compensation packages to their CEOs.
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