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Say on pay is a term used for a role in corporate law whereby a firm's shareholders have the right to vote on the
remuneration Remuneration is the pay or other financial compensation provided in exchange for an employee's ''services performed'' (not to be confused with giving (away), or donating, or the act of providing to). A number of complementary benefits in addition ...
of executives. Often described in
corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...
or management theory as an
agency problem Agency may refer to: Organizations * Institution, governmental or others ** Advertising agency or marketing agency, a service business dedicated to creating, planning and handling advertising for its clients ** Employment agency, a business that ...
, a corporation's managers are likely to overpay themselves because, directly or indirectly, they are allowed to pay themselves as a matter of general management power. Directors are elected to a board that has a
fiduciary duty A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for examp ...
to protect the interests of the corporation. In large listed companies, executive compensation will usually be determined by a compensation committee composed of board members. Proponents argue that “say on pay” reforms strengthen the relationship between the board of directors and shareholders, ensuring that board members fulfill their fiduciary duty

Critics of the policy believe that “say on pay” does not effectively or comprehensibly monitor compensation, and consider it to be reactionary policy rather than proactive policy, because it does not immediately affect the Board of Directors. Some argue it is counter-productive because it diminishes the authority of the Board of Directors

The effect of ‘say on pay’ measures can be binding or non-binding, depending on regulatory requirements or internal corporate policy as determined by proxy votes.


Switzerland

On the 3rd of March the Swiss voted by 69.7 per cent to ensure shareholders, pension funds and not banks, entirely control questions of executive pay. Shareholders must elect all members of a company's remuneration committee of all Swiss public listed companies. They further should receive annual votes on the identity of all members of the board of directors. The role that banks played in casting votes on other shareholders behalf has been abolished.


Australia

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 introduced in the
Corporations Act 2001 The ''Corporations Act 2001'' (Cth) is an Act of the Parliament of Australia, which sets out the laws dealing with business entities in the Commonwealth of Australia. The company is the Act's primary focus, but other entities, such as partner ...
new sections 250R(2), 250U-V, so that if at two consecutive meetings over 25% of shareholders vote against the directors’ remuneration package, the directors have to stand for election again in 90 days.


UK law

Originally
UK company law The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary lega ...
set a default rule that the remuneration of directors was to be set, binding, by the company's general meeting, under
Table A Table A in UK company law is the old name for the Model Articles or default form of articles of association for companies limited by shares incorporated either in England and Wales or in Scotland before 1 October 2009 where the incorporators do n ...
, article 54, attached to the
Companies Act 1862 The Companies Act 1862 (25 & 26 Vict. c.89) was an Act of the Parliament of the United Kingdom regulating UK company law, whose descendant is the Companies Act 2006. Provisions *s 6 'Any seven or more persons associated for any lawful purpose may ...
. Over time more and more companies gave the right to directors, which is the position found in the
Model Articles The Companies (Model Articles) Regulations 2008SI 2008/3229 are the default company constitution for limited companies under UK company law. The Model Articles will apply to a limited company if it does not register its own articles or, if it doe ...
for companies today, that remuneration of the directors shall be determined by the directors. The United Kingdom was the forerunner in mandating that shareholders be allowed a ''non-binding'', or advisory vote on pay. In the UK, section 439 of the
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
mandates a vote on director pay at the yearly accounts meeting. Directors are expected to have disclosed their remuneration package in a "Remuneration Report" (section 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 London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St P ...
Listing Rule 9.4.1. Under the
UK Corporate Governance Code The UK Corporate Governance code, formerly known as the Combined Code (from here on referred to as "the Code") is a part of UK company law with a set of principles of good corporate governance aimed at companies listed on the London Stock Exchang ...
, with which all listed companies must comply or explain why they do not, a binding vote on approval of long-term incentive plans is recommended. Under section 188 of the Companies Act 2006 a
shareholder resolution With respect to public companies in the United States, a shareholder resolution is a proposal submitted by shareholders for a vote at the company's annual meeting. Typically, resolutions are opposed by the corporation's management, hence the insis ...
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, section 319). Lastly, frivolous categories of compensation are limited under section 215, by prohibiting payments for loss of office (i.e. no golden parachutes), except, under section 220, in respect of damages for existing obligations and pensions. Although the say on pay provision in section 439 is not binding on the board, the message in UK law is influential, because company members have an unrestricted right to fire any director, with reasonable notice, under section 168. The debate, however, moved on to whether the vote should become binding. Changes were introduced in the
Enterprise and Regulatory Reform Act 2013 The Enterprise and Regulatory Reform Act 2013 (c 24), also known as ERRA, is a major Act of the Parliament of the United Kingdom aimed at reforming the regulatory environment faced by small and medium-sized business. It establishes a UK Green In ...
section 79 to make the overall policy of pay be capable of being rejected by shareholders, but that no specific right to determine the amount has yet been introduced.


US law

In the
Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Recess ...
§951, a new say on pay provision was introduced. There had been several recent efforts to require Say on Pay resolutions in the United States. In 2007, the Chairman of the Financial Services Committee Rep.
Barney Frank Barnett Frank (born March 31, 1940) is a former American politician. He served as a member of the U.S. House of Representatives from Massachusetts from 1981 to 2013. A Democrat, Frank served as chairman of the House Financial Services Committ ...
sponsored legislation that was passed by the House of Representatives, giving shareholders a non-binding vote on executive compensation

Then Senator
Barack Obama Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the ...
authored a "Say on Pay" proposal, but his legislation stalled in the Senate

The economic crisis has affected corporate governance in the United States of America. The
Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008, often called the "bank bailout of 2008", was proposed by Treasury Secretary Henry Paulson, passed by the 110th United States Congress, and signed into law by President George W. Bush. It became ...
(EESA), which established the
Troubled Asset Relief Program The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President ...
, required say on pay resolutions at companies with outstanding funds from the TARP. In the
American Recovery and Reinvestment Act of 2009 The American Recovery and Reinvestment Act of 2009 (ARRA) (), nicknamed the Recovery Act, was a stimulus package enacted by the 111th U.S. Congress and signed into law by President Barack Obama in February 2009. Developed in response to the Gr ...
, Senator
Chris Dodd Christopher John Dodd (born May 27, 1944) is an American lobbyist, lawyer, and Democratic Party politician who served as a United States senator from Connecticut from 1981 to 2011. Dodd is the longest-serving senator in Connecticut's history. ...
amended Section 111 of the EESA, and updated policy on Executive Compensation in Section 7. The amended legislation continued the "Say on Pay" policy established originally in the EESA. On February 4, 2009, Treasury Secretary
Timothy Geithner Timothy Franz Geithner (; born August 18, 1961) is a former American central banker who served as the 75th United States Secretary of the Treasury under President Barack Obama from 2009 to 2013. He was the President of the Federal Reserve Bank o ...
stated that companies that have received exceptional financial recovery assistance from the TARP fund would have to subject executive compensation to "Say on Pay" resolutions. On June 10, 2009, Secretary Geithner stated that the Administration supports "Say on Pay" legislation, and it would authorize the SEC authority to implement "Say on Pay" regulations at all companies, not only those that have outstanding funds from the TARP, contingent on Congressional approval. Additionally, the Treasury reconciled its proposals from February 4 with Congressional amendments to the EESA in the Final Interim Rule on TARP Standards for Compensation and Corporate Governance. On July 31, 2009, H.R. 3269, the "Corporate and Financial Institution Compensation Fairness Act of 2009" passed the House of Representatives. The House bill included a section that allowed for a 'say on pay' for all public institutions in the United States. Additionally, it had a provision for a shareholder vote on golden parachutes. In the Senate, Senator Charles Schumer had introduced the Shareholder Bill of Rights. The House and Senate bills were reconciled in a final bill that was signed by President Obama on July 21, 2010 called The Dodd–Frank Wall Street Reform and Consumer Protection Act. In 2012, only 2.6% of companies which voted on say on pay measures failed to pass them.


EU law

The
European Union The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been de ...
has remained tentative about harmonising rules on CEO pay for a long time. 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 2017, Directive (EU) 2017/828 (Shareholders Right Directive II) has taken some revolutionary steps in that matter in aim to eliminate practices based on short term gains. With transposition having its deadline on June 10, 2019, the directive introduced remunerative policies, which have to be approved by the shareholders. Earnings of each director (both executive and non-executive) shall be specified in accordance with these policies.


German reforms

The Coalition Government of Germany has recently passed reforming legislation to the Stock Corporation Act to introduce a non-binding say on pay.


Examples of shareholder revolts

Incidents at large UK companies in which shareholders have "revolted" against the size of pay awards given to board members, since the "say on pay" legislation was introduced. *
Vodafone Vodafone Group plc () is a British multinational telecommunications company. Its registered office and global headquarters are in Newbury, Berkshire, England. It predominantly operates services in Asia, Africa, Europe, and Oceania. , Vod ...
shareholders voted 10% against, and 30% in abstention from £13m in shares for CEO Sir Chris Gent. (July 2001) *
Royal & Sun Alliance RSA Insurance Group Limited ( trading as RSA, formerly RSA Insurance Group plc and Royal and Sun Alliance) is a British multinational general insurance company headquartered in London, England. RSA has major operations in the United Kingdom, Ir ...
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. (May 2003) * GlaxoSmithKline shareholders voted 50.72% (advisorily) against a £22m bonus salary and stock severance package for CEO Jean-Pierre Garnier. 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. (May 2003) * 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/Granada 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. (August 2003) *
Unilever Unilever plc is a British multinational consumer goods company with headquarters in London, England. Unilever products include food, condiments, bottled water, baby food, soft drink, ice cream, instant coffee, cleaning agents, energy dri ...
Former chairman Niall Fitzgerald got £1.2m after profits fell. (April 2005) *
Tesco Tesco plc () is a British multinational groceries and general merchandise retailer headquartered in Welwyn Garden City, England. In 2011 it was the third-largest retailer in the world measured by gross revenues and the ninth-largest in th ...
shareholders voted 15% against an £11.5m bonus on Sir Terry Leahy’s salary as CEO. It was linked to the success of the firm's Fresh & Easy chain in the US. The
Association of British Insurers The Association of British Insurers or ABI is a trade association made up of insurance companies in the United Kingdom. History The ABI began in 1985 after several specialised insurance industry trade associations joined to form one trade associa ...
and PIRC were against. (June 2007) In the first year of mandatory shareholder advisory "say on pay" voting in the US, 37 Russell 3000 companies failed to receive majority support from shareholders. In the second year of voting, 44 Russell 3000 companies have failed as of June 12, 2012. Companies include: *
Nabors Industries Nabors Industries Limited is an American global oil and gas drilling contractor that has operated since 1972. Based in Houston, Texas, Nabors owns the largest land drilling fleet in the world with approximately 400 rigs in more than 20 countrie ...
shareholders voted against "say on pay" in both 2011 and 2012 (75% opposition in 2012) given concerns over the company's high CEO pay and severance payments. Shareholders also voted against the company's new incentive bonus plan and long-term incentive plan in 2012. * Hewlett Packard failed a "say on pay" vote in 2011 in light of new CEO Léo Apotheker's employment agreement and the company's stock performance. * Citigroup failed "say on pay" with 55% opposition in 2012 after giving CEO
Vikram Pandit Vikram Shankar Pandit (born 14 January 1957) is an Indian-American banker and investor who was the chief executive officer of Citigroup from December 2007 to 16 October 2012 and is the current chairman and chief executive officer of The Oroge ...
three retention grants valued at $27.9 million.


Academic skepticism

Brian Cheffins of
Cambridge University The University of Cambridge is a Public university, public collegiate university, collegiate research university in Cambridge, England. Founded in 1209 and granted a royal charter by Henry III of England, Henry III in 1231, Cambridge is the world' ...
and Randall Thomas of
Vanderbilt University Vanderbilt University (informally Vandy or VU) is a private research university in Nashville, Tennessee. Founded in 1873, it was named in honor of shipping and rail magnate Cornelius Vanderbilt, who provided the school its initial $1-million ...
predicted that a 'say on pay' could hold back sudden jumps, but it would not stop the general upward drift in pay rates. Ryan Krause and colleagues argued that 'say on pay' offered little information to the board of directors beyond disapproval of CEO compensation not being in line with firm performance.


See also

* Board of directors *
Corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...
*
Executive compensation Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, varia ...
* Form 10-K


Notes


Further reading

*B Cheffins and RS Thomas, ‘Should shareholders have a greater say over executive pay?’ (2001) 1 Journal of Corporate Law Studies 277


External links


Institute for governance of private and public organizations
* Joann Lubli
'Candidates Target Executive Pay'
(12.4.2008) * USA Toda

(July 2009) {{DEFAULTSORT:Say On Pay United Kingdom company law Corporate law Shareholders Executive compensation