Say on Pay : Cautionary Notes on the U.K. Experience and the Case for Shareholder Opt-In

Shareholder and public dissatisfaction with executive compensation has led to calls for an annual shareholder advisory vote on firms’ compensation practices and policies, so-called “say on pay.” Proposed federal legislation would mandate “say on pay” generally for U.S. public companies. This Article assesses the case for such a mandatory federal rule in light of the U.K. experience with a similar regime adopted in 2002. The best argument for a mandatory rule is that it would destabilize pay practices that have produced excessive compensation and that would not yield to firm-by-firm pressure. This has not been the U.K. experience; pay continues to increase. The most serious concern is the likely evolution of a “best compensation practices” regime which would embed normatively-opinionated practices that would ill-suit many firms. There is some evidence of a U.K. evolution in that direction. This problem might be more pronounced in the U.S. because shareholders are even more likely than their U.K. counterparts to delegate judgments over compensation practices to a small number of proxy advisors who themselves will be economizing on analysis. The Article argues instead for a federally provided shareholder opt-in right to a “say on pay” regime, which would change the present reliance on precatory proposals in the issuer proxy, which are in turn subject to the power delegated to shareholders under state law. Secondarily, the Article argues that any mandatory regime should be limited to the 500 largest public companies by public market float and should not cover the more than 12,000 firms subject to SEC oversight. Compensation practices at key financial firms present a distinct set of safety and soundness issues because of potential systemic risk from a failure of such firms. These concerns should be addressed separately