“Say on pay” seems like one of those “chicken soup” ideas — at best salutary and at worst unobjectionable. Who could object to letting the shareholders vote on executive pay?
Minor Myers, for one, in The Perils of Shareholder Voting on Executive Compensation. He suggests that “the more involved shareholders are in a firm’s managerial decisions, the more difficult it is for directors to be held accountable for the outcome of those decisions.” The shareholder vote, he argues, will insulate directors’ compensation decisions from shareholder outrage, which might otherwise have served as an important discipline. He “proposes amending the [say on pay] legislation to allow firms to opt-out of the say on pay regime by shareholder vote. This preserves the benefits of say on pay for those firms where shareholders wish to retain it and allows other firms to exit the regime at little cost.”
This proposal makes some sense. Myers cites evidence indicating that some firms gain and others lose from say on pay. In other words, some firms find that they benefit more from holding directors solely responsible for managerial pay than by having the (mostly disengaged) shareholders take responsibility. Indeed, Myers’ theory suggests say on pay may be a boon to greedy managers.
Larry goes on to analyze whether the rule should be opt out or opt in.
In any case, the SEC and Congress' refusal to make say on pay optional is one of the com plaints that I register about the rule in my forthcoming book Corporate Governance after the Financial Crisis:
[Professor Jeffrey] 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.” He recommended that any federal rule be limited to an opt-in regime or, if some form of mandatory regime was politically necessary, that it be limited to the very largest firms. Gordon’s proposal finds support in a recent behavioral economics laboratory experiment finding that say on pay has a more positive impact on investors when it is voluntarily effected by companies than when it is mandated. As we have seen, however, Congress went in a different direction, despite the considerable uncertainty as to whether say on pay will be effective.