SEC Adopts Shareholder “Say-on-Pay” Rules

Shareholders of U.S. publicly listed companies now have an opportunity to be heard on executive compensation through advisory votes, under a new rule adopted by U.S. securities regulators in April 2011. The "say-on-pay" rules, approved in a 3-2 vote by the Securities and Exchange Commission, implements a provision in the Dodd-Frank Wall Street reform law, another one of Obama’s desires as previously noted.

It is designed to give shareholders greater input over executive compensation after many investors expressed outrage during the financial crisis at lavish pay practices. The “say-on-pay” votes are non-binding, although companies generally want to avoid the embarrassment of a "no" vote. Shareholders would also get a chance to vote on "golden parachute" compensation arrangements in connection with a merger or acquisition, and companies would be required to make additional disclosures about such compensation arrangements.

Dodd-Frank legislation for the first time made “say on pay” votes mandatory in 2011. As the proxy season began shareholders had voted against several pay plans, indicating that they do care and that they are discerning enough to be able to tell the difference between a pay plan that may be excessive and one that has a material negative impact on shareholder value.

It is interesting to note that no votes on pay did not come from a small group of activists. At Beazer, for example, almost 15 % of the stock was held by Fidelity and 81 % is held by institutions. Shuffle has more than 87 % institutional holdings. It appears, based on these early examples that ownership may be as important a predictor of a no vote as the pay-performance link. These investors who care most and best understand the impact on shareholder

value of excessive compensation are the same number-crunchers who make the buy-sell-hold decisions. It should be noted that the majority the shares of public companies are owned by institutions, not the infamous little old lady from Pasadena that inherited the shares when her husband passed away.

Perhaps, excessive compensation is starting to be put to a real market test by institutional shareholders?

Putting Compensation into Perspective

Of course, all of this needs to be put within a greater context of compensation and performance. Perhaps the story of a young baseball player helps illuminate the disparities best. On April 22, 2011, the American League baseball team, the Milwaukee Brewers signed All-Star outfielder Ryan Braun to a five-year $105 million contract extension through the 2020 baseball season.

The deal also included a mutual option for one additional year worth up to $20 million (obviously conspicuous and great). Braun is one of the better baseball players in the league having hit 128 home runs in his first four years as a player, the eighth- most in Major League Baseball history. On the other hand, even though Braun has been a star, his team has yet to win the coveted World Series during his tenure as a player with them (organizational performance).

Perhaps another important question is then, should a CEO of a major corporation be paid only half that of a twenty- something year old baseball player who theoretically works only 162 days a year? Where are the compensation czars of sports?