Giving shareholders a say on pay
IN A market that operates on the principle of “caveat emptor’’ or “buyer beware’’, why not grant buyers (ie shareholders) a say in how much their managers are paid?
It’s certainly an interesting question to ponder, given that several developed markets have, in some form or other, incorporated “Say on Pay’’ in their governance rules.
Corporate governance advocates here would say “yes’’ to such a proposition, given the seemingly exorbitant salaries being doled out, especially by small-to-mid-sized companies.
In one recent case for instance, a mid-sized company’s CEO whose share price has been declining over the years received a 2022 salary higher than that of a bank CEO, despite the bank having a market capitalisation almost 80 times greater and profits that were about 40 times that of the company.
Shareholders of the mid-sized company in this case could justifiably argue that the salary was not commensurate with performance. However, while everyone would agree that how well a top executive performs should determine how much he or she receives, defining performance is actually notoriously difficult.
One problem is the complexity surrounding how it is reported. For example, Columbia Law School in a 2016 blog post said that for the 50 largest companies on the Toronto Stock Exchange in 2015 that were also listed back in 2000, the median number of pages needed to describe their executives’ compensation rose from six in 2000 to 34 in 2015, with some compensation descriptions taking as many as 66 pages.
The same problem was found to exist in the UK, which arguably was the first country to officially incorporate “Say on Pay’’ as law when in 2002 the government introduced regulations that required a directors’ remuneration report to be put to a shareholder vote, albeit non-binding, at each annual general meeting (AGM).
Although shareholder outrage over executive pay in the UK has remained high since, a recent paper by the University of Exeter reported that less than 10 per cent of shareholders abstain from, or vote against, compensation reports.
One major reason could be the difficulty in understanding performance measurement, while another is that companies often use “stealth compensation methods to obfuscate the exact amounts being paid to the executives’’, which render the remuneration reports unreadable by most laypersons.
Perhaps one way to appease shareholders and force companies to think twice about pay is to cap executive salaries at a multiple of the wages of the lowest-paid worker, or at least to disclose this multiple.
For instance, in the US, although there is no mandatory cap, a requirement to report not only CEO pay, but also the overall ratio of the CEO’s salary relative to the average wages of company workers, is now required.
Here, companies will have to give full details of executive compensation for annual reports prepared for the financial years ending on or after Dec 31, 2024 – a big step forward from past practices when salary disclosure was vague and concealed in bands.
Notwithstanding the difficulties outlined above, surely an even bigger step forward would be to study how best to allow shareholders to have a say on pay.
