It is all but certain that Senator Schumer’s forthcoming Shareholder Bill of Rights will include a say on pay requirement and, I assume, it is all but certain that a say on pay requirement will be passed into law.
Whether say on pay should be the law of the land is an interesting issue that, I am sure, I will not be able to resist discussing here in the future.
However, because today I am assuming that say on pay will be the law of the land, and because today I am wearing the corporate lawyer’s uniform, a uniform that, when donned, magically transforms its wearer from a philosophical but Quixotic idealist into a hard-nosed, pragmatic and adaptive realist, today I am only concerned with one issue: How will this new reality affect corporate clients?
Say on pay is all about stigma. Initially, shareholder activists identified companies whose combination of high pay and low performance left them vulnerable, and targeted them with say on pay proposals. These proposals drew unwanted attention to these companies, putting them on the defensive. Even when the proposals didn’t pass, and most didn’t, the say on pay campaigns left the targeted companies stigmatized.
So, in the beginning, the mere threat of a say on pay proposal was a potent weapon for the activists.
However, the activists recently overplayed their hand, proposing say on pay at numerous companies, many with decent pay practices. With so many proposals floating around, a say on pay campaign no longer carried the old stigma. The activists had ceded some control over the issue to the other shareholders, because now the stigma would only attach to a company if its proposal passed. This was proving difficult for the activists to achieve.
The activists may have eventually succeeded in getting more say on pay proposals passed, which would have re-sharpened their stigma weapon. On its face, a say on pay proposal sounds so reasonable (shareholder thinks: “hey, why shouldn’t I have a say on pay?”) that there was a chance these proposals would start passing in large numbers, even at companies with decent pay practices. Such a cascade of approvals might have boosted the activists’ movement. Or, if enough “good corporate citizens” were saddled with say on pay, perhaps the cascade would have diluted the stigma, even for the bad citizens. The stigma game would shift away from the say on pay proposals to each year’s say on pay votes.
However, now that Congress is intervening, there will never be a cascade of approvals for the proposals, so we will never know how that would have played out. The stigma game will change. Neither the activist’s threat of a say on pay proposal, nor the fact that a company is forced to give its shareholders a say on pay, will carry any stigma. That stigma will instead attach only when shareholders actually say “no.”
If shareholders say “no” all the time, their “no” votes won’t carry much of a stigma. Companies with the worst pay practices will be better off than they were before, as indiscriminate “no” votes will just lump them together with companies with decent pay practices. They will find safety in numbers. And those companies with decent pay practices will have “no” votes that carry little, if any, stigma, so those companies will be no worse off than before.
If, on the other hand, shareholders say “no” rarely, their “no” votes will stigmatize. When no votes are rare, I assume companies with the highest pay and lowest performance are most likely to get the “no” votes, so these companies will bear the brunt of this stigma. However, I doubt these companies will be much worse off than they were before because these were the same companies initially targeted with say on pay proposals. For these companies, it will feel like déjà vu all over again.
Meanwhile, I expect the rest of our public companies will find themselves better off than they were before. With mandatory say on pay, their compensation will now be publicly blessed by their shareholders each year, making it harder to challenge. And, over time, as more and more companies see their compensation approved, it will be that much harder for activists to make a case that executive compensation, whether at those companies or in general, is broken and needs to be fixed.