Say On Pay

In an effort to decrease executive compensation levels, the Obama administration today provided Congress a bill encouraging shareholders to be more involved in determining compensation. The so-called "say on pay" legislation has three concerns: executive pay, golden parachutes and compensation committee independence. It's a nice political move, but I don't think it will amount to much else.

Here's the proposed legislation (link to .pdf) if you're interested. It would give shareholders a non-binding vote on executive compensation and golden parachutes. In other words, shareholders can say they don't like it, but it won't really matter. So what's the point? According to the Treasury, via Reuters:

Even though the shareholder votes on compensation would be non-binding, Treasury officials said the prospect of a public vote on such matters would influence companies and persuade them to link pay more directly with performance.

So let me get this straight. The shareholders are being asked to make the public angry at its management? I don't know what world the Treasury lives in, but in the world I'm familiar with, shareholders probably don't want to damage public sentiment about the company they own. After all, share price is generally not be best served by getting the public angry at your management. Other than a few exceedingly rare occasions of obscene compensation gaffes, I just don't see shareholders wanting to condemn management for its pay.

Then there's the part about compensation committee independence. The idea here is that those in charge of compensation levels should be independent. That seems pretty straightforward, and I don't have much of a problem with it.

However, I do appreciate the delicious irony of Congress telling people it's bad to set their own pay. Maybe shareholders in the U.S., i.e. citizens, should also have an annual non-binding resolution on Congressional pay -- to make sure their pay is also better linked to performance. With Congressional approval ratings hovering around 19%, I'm sure we all know how that would turn out.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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