Say on pay
is a term used for a rule in corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
whereby a firm's shareholders have the right to vote on the remuneration
Remuneration is the total compensation that an employee receives in exchange for the service they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary...
Often described in corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
or management theory as an agency problem, a corporation's directors are likely to overpay themselves because, directly or indirectly, they are allowed to pay themselves as a matter of general management power. Directors are elected to a board that has a fiduciary duty
to protect the interests of the corporation. In large listed companies, executive compensation will usually be determined by a compensation committee comprising board members. Proponents argue that “say on pay” reforms strengthen the relationship between the board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and shareholders, ensuring that board members fulfill their fiduciary duty. http://millstein.som.yale.edu/Davis_Say_on_Pay_Policy_Briefing.pdf
Critics of the policy believe that “say on pay” does not effectively or comprehensibly monitor compensation, and consider it to be reactionary policy rather than proactive policy, because it does not immediately affect the Board of Directors. Some argue it is counter-productive because it diminishes the authority of the Board of Directors. http://www.cfo.com/article.cfm/11485334/2/c_2984789
The effect of ‘say on pay’ measures can be binding or non-binding, depending on regulatory requirements or internal corporate policy as determined by proxy votes.
Originally UK company law set a default rule that the remuneration of directors was to be set, binding, by the company's general meeting, under Table A
Table A in UK company law is the old name for to the Model Articles or default form of articles of association for companies limited by shares incorporated either in England and Wales or in Scotland before 1 October 2009 where the incorporators do not explicitly choose to use a modified form...
, article 54, attached to the Companies Act 1862
The Companies Act 1862 was an Act of the Parliament of the United Kingdom regulating UK company law, whose descendant is the Companies Act 2006.-Provisions:...
. Over time more and more companies gave the right to directors, which is the position found in the Model Articles
The Companies Regulations 2008 are the basis for a company constitution under UK company law, unless modified by the Articles of a specific company. The new Model Articles came into force on 1 October 2009 and update the old Companies Act 1985 Table A Articles.-Private companies:Schedule 1...
for companies today, that remuneration of the directors shall be determined by the directors.
The United Kingdom was the forerunner in mandating that shareholders be allowed a non-binding
, or advisory vote on pay. In the UK, section 439 of the Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
mandates a vote on director pay at the yearly accounts meeting. Directors are expected to have disclosed their remuneration package in a "Remuneration Report" (section 420). Failure to do this leads to fines.
In addition, UK law regulates more tightly a number of elements beyond basic director pay. Employee share schemes that directors have must be approved by ordinary resolution under the London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
Listing Rule 9.4.1. Under the Combined Code
The UK Corporate Governance Code 2010 is a set of principles of good corporate governance aimed at companies listed on the London Stock Exchange. It is overseen by the Financial Reporting Council and its importance derives from the Financial Services Authority's Listing Rules...
, with which all listed companies must comply or explain why they do not, a binding vote on approval of long term investment plans is recommended. Under section 188 of the Companies Act 2006 a shareholder resolution
With respect to public companies in the United States, Shareholder resolutions are proposals submitted by shareholders for a vote at the company's annual meeting. Typically, resolutions are opposed by the corporation's management, hence the insistence for a vote...
is necessary to approve a director’s contract lasting more than a 2 year term (reduced from approval beyond a 5 year term under the old Companies Act 1985, section 319). Lastly, frivolous categories of compensation are limited under section 215, by prohibiting payments for loss of office (i.e. no golden parachutes), except, under section 220, in respect of damages for existing obligations and pensions.
Although the say on pay provision in section 439 is not binding on the board, the message in UK law is influential, because company members have an unrestricted right to fire any director, with reasonable notice, under section 168. The debate, however, has now moved on to whether the vote should become binding.
There have been several recent efforts to require Say on Pay resolutions in the United States. In 2007, the Chairman of the Financial Services Committee Rep. Barney Frank
Barney Frank is the U.S. Representative for . A member of the Democratic Party, he is the former chairman of the House Financial Services Committee and is considered the most prominent gay politician in the United States.Born and raised in New Jersey, Frank graduated from Harvard College and...
passed legislation in the House of Representatives that gave shareholders a non-binding vote on executive compensation. http://www.cfo.com/article.cfm/8946280?f=related
Then a Senator, Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
authored a "Say on Pay" proposal, but his legislation stalled in the Senate. http://www.cfo.com/article.cfm/11037327/c_11036422
The economic crisis has affected corporate governance in the United States. The Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
(EESA), which established the Troubled Assets Relief Program
The Troubled Asset Relief Program is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008...
, required say on pay resolutions at companies with outstanding funds from the TARP. In the American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009, abbreviated ARRA and commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted by the 111th United States Congress in February 2009 and signed into law on February 17, 2009, by President Barack Obama.To...
, Senator Chris Dodd amended Section 111 of the EESA, and updated policy on Executive Compensation in Section 7. The amended legislation continued the "Say on Pay" policy established originally in the EESA.
On February 4, 2009, Treasury Secretary Timothy Geithner stated that companies that have received exceptional financial recovery assistance from the TARP fund would have to subject executive compensation to "Say on Pay" resolutions. On June 10, 2009, Secretary Geithner stated that the Administration supports "Say on Pay" legislation, and it would authorize the SEC authority to implement "Say on Pay" regulations at all companies, not only those that have outstanding funds from the TARP, contingent on Congressional approval. Additionally, the Treasury reconciled its proposals from February 4 with Congressional amendments to the EESA in the Final Interim Rule on TARP Standards for Compensation and Corporate Governance.
On July 31, 2009, H.R. 3269, the "Corporate and Financial Institution Compensation Fairness Act of 2009" passed the House of Representatives. The House bill included a section that allowed for a 'say on pay' for all public institutions in the United States. Additionally, it had a provision for a shareholder vote on golden parachutes. In the Senate, Senator Charles Schumer has introduced the Shareholder Bill of Rights. The House and Senate bills were reconciled in a final bill that was signed by President Obama on July 21, 2010 called The Dodd–Frank Wall Street Reform and Consumer Protection Act.
The European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
has remained tentative about harmonising rules on CEO pay. In the High Level Group of Company Law Experts' Final Report
in 2002, they stated they would not wish to impose a requirement for voting EU wide, yet.
"Some Member States require, or are considering requiring, a form of mandatory or advisory vote by
shareholders on the remuneration policy. We do not believe a shareholder vote on the remuneration policy generally should be an
EU requirement, as the effects of such a vote can be different from Member State to Member State. The important thing is that
shareholders annually have the opportunity to debate the policy with the board.
However, a different approach is taken to share schemes, which were recommended to be more closely scrutinised.
The Coalition Government of Germany has recently passed reforming legislation to the Stock Corporation Act to introduce a non-binding say on pay.
Examples of shareholder revolts
Incidents at large UK companies in which shareholders have "revolted" against the size of pay awards given to board members, since the "say on pay" legislation was introduced.
Vodafone Group Plc is a global telecommunications company headquartered in London, United Kingdom. It is the world's largest mobile telecommunications company measured by revenues and the world's second-largest measured by subscribers , with around 341 million proportionate subscribers as of...
shareholders voted 10% against, and 30% in abstention from £13m in shares for CEO Sir Chris Gent. (July 2001)
- Royal & Sun Alliance shareholders voted 28% against a £250,000 retention bonus for CFO Julian Hance and £1.44m severance pay for CEO Bob Mendelsohn. The share price had just dropped. (May 2003)
GlaxoSmithKline plc is a global pharmaceutical, biologics, vaccines and consumer healthcare company headquartered in London, United Kingdom...
shareholders voted 50.72% (advisorily) against a £22m bonus salary and stock severance package for CEO Jean-Pierre Garnier. Chairman Sir Christopher Hogg said it was just the difference in culture to the US that was holding Britain back and they should accept it. The TUC had been lobbying pension funds. (May 2003)
ITV is the major commercial public service TV network in the United Kingdom. Launched in 1955 under the auspices of the Independent Television Authority to provide competition to the BBC, it is also the oldest commercial network in the UK...
shareholders were 40% against a £15m (£1.8m cash, rest shares) payoff to Chairman Michael Green. It was justified on the basis that he would have taken legal action were it not paid, because he was removed prior to the Carlton/Granada merger.
- Places :United Kingdom* Berkley, SomersetUnited States* Berkley, Colorado* Berkley, Iowa* Berkley, Maryland* Berkley, Massachusetts* Berkley, Michigan* Berkley, Virginia, formerly a town, and now a neighborhood in Norfolk, Virginia...
Managing Director and founder of the property company had 47% of shareholders vote against his £1.2m (out of a total £4.7m package) under a long term incentive scheme that he had not actually belonged to. (August 2003)
Unilever is a British-Dutch multinational corporation that owns many of the world's consumer product brands in foods, beverages, cleaning agents and personal care products....
Former chairman Niall Fitzgerald got £1.2m after profits fell. (April 2005)
Tesco plc is a global grocery and general merchandise retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues and the second-largest measured by profits...
shareholders voted 15% against an £11.5m bonus on Sir Terry Leahy’s salary as CEO. It was linked to the success of the firm's Fresh & Easy chain in the US. The Association of British Insurers
The Association of British Insurers or ABI is a trade association made up of insurance companies in the United Kingdom.-History:The ABI began in 1985 after several specialised insurance industry trade associations, including the British Insurance Association, the Life Offices’ Association, the Fire...
Pensions & Investment Research Consultants Ltd is one of the largest pension representation and lobby groups in the United Kingdom. It deals with well over £200b of assets invested by pension holders. It does research work on corporate governance Pensions & Investment Research Consultants Ltd (or...
were against. (June 2007)
Two professors, Brian Cheffins of Cambridge University and Randall Thomas of Vanderbilt University
Vanderbilt University is a private research university located in Nashville, Tennessee, United States. Founded in 1873, the university is named for shipping and rail magnate "Commodore" Cornelius Vanderbilt, who provided Vanderbilt its initial $1 million endowment despite having never been to the...
predicted that a 'say on pay' could hold back sudden jumps, but it would not stop the general upward drift in pay rates.