The Corporate law and Governance Blog reports that:
Later this month the Government will publish proposals following its consultation on executive remuneration. However, ahead of this announcement, the Prime Minister had made clear that shareholders in the largest companies are to be given a binding vote on remuneration: see here.
I find this rather curious, given that nonbinding say on pay votes in the UK haven't proven all that impressive. As I wrote in Corporate Governance after the Financial Crisis
Professor Jeffrey Gordon argues that the U.K. experience with say on pay makes a mandatory vote a “dubious choice.” First, because individualized review of compensation schemes at the 10,000-odd U.S. reporting companies will be prohibitively expensive, activist institutional investors will probably insist on a narrow range of compensation programs that will force companies into something close to a one size fits all model. Second, because many institutional investors rely on proxy advisory firms, a very small number of gatekeepers will wield undue influence over compensation. This likely outcome seriously undercuts the case for say on pay. Proponents of say on pay claim it will help make management more accountable, but they ignore the probability that say on pay really will shift power from boards of directors not to shareholders but to advisory firms like RiskMetrics. There is good reason to think that boards are more accountable than those firms. “The most important proxy advisor, RiskMetrics, already faces conflict issues in its dual role of both advising and rating firms on corporate governance that will be greatly magnified when it begins to rate firms on their compensation plans.” Ironically, the only constraint on RiskMetrics’ conflict is the market—i.e., the possibility that they will lose credibility and therefore customers—the very force most shareholder power proponents claim does not work when it comes to holding management accountable.
As for the U.K. experience, Gordon’s review of the empirical evidence finds that shareholders almost invariably approve the compensation packages put to a vote. He further finds that while there is some evidence that pay for performance sensitivity has increased in the U.K., executive compensation has continued to rise significantly in the U.K. Indeed, the growth rate for long-term incentive plans has been higher than in the U.S.
Gordon concludes “that ‘say on pay’ has some downsides even in the United Kingdom, downsides that would be exacerbated by a simple transplant into the United States.”
