Say on pay
is a slogan for laws that give shareholders of corporations a vote on how much the boards of directors will be remunerated. In the field of corporate governance
, this issue has become increasingly political due to the incessant upward trend of director remuneration
. The purpose is to hold directors more accountable for their performance, and tie performance to the pay directors receive.
Laws have already been introduced in Australia and the United Kingdom to allow shareholders a non-binding
, or advisory vote on pay. In the UK, s.439 of the Companies Act 2006
mandates a vote on director pay at the yearly accounts meeting. Directors are expected to have disclosed their remuneration package in a "Remuneration Report" (s.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 Listing Rule 9.4.1. Under the Combined Code, 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 s.188 of the Companies Act 2006 a shareholder resolution 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, s.319). Lastly, frivolous categories of compensation are limited under s.215, by prohibiting payments for loss of office (i.e. no golden parachutes), except, under s.220, in respect of damages for existing obligations and pensions.
EU and US proposals
The European Union
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.
In the US, there is a renewed push towards passing legislation for shareholders to have a non-binding vote. The first well-publicised case of a company allowing shareholders to vote on director pay was Aflac. Also, presumptive Democratic Presidential nominee Barack Obama has been calling for the legislation to be passed as a way to stop directors walking away with large salaries for having done little. John McCain then jumped on board two months later with the same proposal.
Examples of shareholder "revolts"
What follows is a list of incidents with large UK companies, where shareholders have "revolted" against the size of pay awards given to board members since the "say on pay" legislation was introduced.
- Vodafone shareholders voted 10% against, and 30% in abstention from £13m in shares for CEO Sir Chris Gent, 25.7.2001.
- Royal and 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. 14.5.2003.
- GlaxoSmithKline shareholders voted 50.72% (advisorily) against a £22m bonus salary and stock severance package for CEO Jean-Pierre Garnier, 20.5.2003. 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.
- ITV 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/Grenada merger.
- Berkley 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, 23.8.2003.
- Unilever, 24.4.2005, former chairman Niall Fitzgerald got £1.2m after profits fell.
- Tesco shareholders voted 15% against an £11.5m bonus on Sir Terry Leahy’s salary as CEO. It was linked to the success of Fresh&Easy in the US. The association of British insurers and Pirc were against. 30.6.2007.
Prof. Brian Cheffins
of Cambridge University
and Prof. Randall Thomas of Vanderbilt University
predicted that a 'say on pay' could hold back sudden jumps, but it would not stop the general upward drift in pay rates (‘Should shareholders have a greater say over executive pay?’ (2001) 1 Journal of Corporate Law Studies