It’s a global trend that’s sweeping financial capitals all over the world, and it’s going to keep things quite interesting for HR leaders at public companies.
The “it” in question is say-on-pay, or the practice of letting shareholders vote on the renumeration awarded to executives of publicly traded companies in order to discourage or prevent corporate boards from granting excessive pay packages not linked to actual performance. Here in the U.S., a provision included as part of the Dodd-Frank Act of 2010 gives shareholders a non-binding vote on executive pay. Earlier this week at WorldatWork’s Total Rewards 2013 conference in Philadelphia, three executive-comp experts discussed its potential long-term effects.
“It’s going to lead to greater homogenization of pay,” said John England, managing partner of Pay Governance LLC. Say-on-pay “is causing some boards of directors to operate in a mode of ‘Let’s keep our heads down and stay under the radar screen.’ I’m not so sure that’s best for shareholders or companies in general.”
Companies in highly competitive sectors — such as technology and bioscience, for example — should be able to adapt their pay practices as they see fit in order to lure and retain the sought-after executive talent in those fields, he said.
Nevertheless, say-on-pay has also “been helpful in providing focus and strength to boards to clean up compensation practices that were not working,” said Steve Harris, managing director of Frederic W. Cook & Co. “I think boards are now at a point where they understand the implications of compensation decisions that may risk a backlash.”
Say-on-pay has also affected executive bonuses, said England. “I do believe it’s much more common now, thanks to say-on-pay, for bonuses to to be much more linked to performance,” he said. “In the past, executives received bonuses even when targets were missed, with the explanation that ‘Yeah, but the targets would’ve been hit had the market conditions not changed.’ Now, there’s no more ‘Yeah, but’ — when targets are missed, no bonus.”
The rise of say-on-pay has made communicating with shareholders a bigger imperative than ever, said England. “If you can influence your shareholders and tell them a story before they read the Institutional Shareholders Services report, that’s good. And it should not just be the HR and legal folks talking to shareholders — if you can get the board members talking with shareholders, that’s great.”
It can be very effective when a CEO meets with shareholders to “tell the company’s story,” said Harris. “Shareholder engagement needs to be done on an ongoing basis, not just when there’s a crisis,” he added. “Develop the relationship now and maintain it regularly; otherwise, you may not have these shareholders to turn to when you do have a crisis.”
Shareholders “love context,” said Blair Jones, managing partner of Semler Brossy Consulting Group. “They eat it right up. Develop a dialogue with your shareholders.”
The specter of a say-on-pay law that is actually binding — a number of European countries have taken, or are considering taking, this step — should keep boards and HR on their toes, said Harris. “I’m concerned about what is happening in Europe coming across the pond and infecting the U.S.,” he said. “Right now, I think Washington’s attention has shifted to jobs and growth, not executive pay. But we have to be careful. When CEO pay escalates sharply against average worker pay, it will inflame things.”
“I do believe we are just one or two scandals away from the prospect of a binding say-on-pay law … in this country,” said England.