5

1

Say-on-Pay: Is Anybody Listening?

Stephani A. Mason
DePaul University, USA

Ann F. Medinets
Rutgers School, USA

Dan Palmon*
Rutgers School, USA

There is an ongoing debate about whether executives receive excessive
compensation, and if so, how to control it. Several countries have instituted
say-on-pay rules (shareholders’ right to vote on executive compensation) to
reduce excessive compensation. However, determining the effectiveness of
say-on-pay is difficult because its tenets vary by country due to political,
institutional, cultural, economic, and social factors. Policy issues like
say-on-pay are complex, ill-structured problems without definitive assumptions,
theories, or solutions. Existing say-on-pay research is inconclusive, since some
studies find no change in CEO compensation around its adoption, whereas other
studies show that say-on-pay lowers CEO pay or changes its composition. This
paper chronicles the history of say-on-pay, compares its implementation by
groups (e.g. shareholders-initiated versus legislated and binding versus
advisory), discusses the complexities of using say-on-pay to address excessive
executive compensation, and recommends future research directions. (JEL:
G380, M480)

Keywords: executive compensation; say-on-pay; compensation regulation;
shareholder activism; shareholder proposals; corporate
governance

* Contact author: Dan Palmon, Rutgers School, 1 Washington Park, Newark,
NJ 07102. Phone: 973-353-5472, Fax: 201-586-0218, E-mail: [email protected]
We wish to thank Natasha Burns, Mary Ellen Carter, Fabrizio Ferri, Betsey Gordon, Udi
Hoitash, Marinilka Kimbro, Kristina Minnick, Fred Sudit, Danielle Xu, Valentina Zamora,
Li Zhang, and Yi Zhou for helpful comments.

(Multinational Journal, 2016, vol. 20, no. 04, pp. 273–322)
© Multinational Society, a nonprofit corporation. All rights reserved.

Multinational Journal274

Article history: Received: 14 March 2016, Received in final revised form:
30 January 2017, Accepted: 31 January 2017, Available
online: 04 July 2017

I. Introduction

According to Peetz (2010) “Executive pay and termination packages
have become a focus of public attention. Across Europe and the U.S.,
four fifths of people believe that business leaders in their countries are
paid too much (Harris Interactive 2009; Blitz 2003). In Australia: nine
in 10 adults believe that chief executive officers (CEOs) get paid too
much; 79 percent believe executive salaries should be capped; four in
five believe high executive salaries do not increase company
performance; and almost two-thirds of people believe high executive
pay leads to higher risk taking (Colmar Brunton 2009; Ferguson 2009).”
Is anybody listening?

In April 2014, the European Commission (EC) proposed requiring
companies listed on European stock exchanges to hold binding
shareholder votes on executive compensation and to disclose how
executive compensation compares to employee compensation. In a
statement, the EC said, “There is an insufficient link between
management pay and performance and this encourages harmful
short-term tendencies.” Under the proposal, shareholders will have the
right to vote every three years on company plans that outline maximum
executive compensation levels, and will also be able to express their
opinions in an annual vote on whether they are satisfied with how a
company’s compensation policies are being applied. In the case of a
negative shareholder vote, the company will need to justify its pay
policy as part of the following year’s report. European Union (EU)
member states will have to write additional rules outlining how
companies should respond if shareholders reject the compensation plans
(European Commission, 2014).

The EU proposal would overhaul existing shareholder rights and
extend say-on-pay beyond many measures already announced by
national governments in Europe. EU lawmakers are responding to
public pressure over growing inequality, driven in part by the widening
gap between the amounts that CEOs and their employees make and a
sense that any positive motivation from big CEO salaries is outweighed
by lower worker morale when the differentials are stretched too far.
This say-on-pay proposal reflects a trend on both sides of the Atlantic,
partly driven by concern over perceived excessive executive

275Say-on-Pay: Is Anybody Listening?

compensation, that has persisted as wages and benefits for most
employees have stagnated.

Say-on-pay is the right of shareholders to vote on the compensation
of the firm’s executives. Its goals are to enhance transparency, improve
executives’ accountability for firm performance, spur shareholder
participation in corporate governance, protect shareholders’ rights to the
firm’s residual income, limit excessive executive compensation, and
reduce executives’ incentives to chase short-term profits (Baird and
Stowasser, 2002). It can be implemented by shareholder proposal or
through legislation, and the effect of say-on-pay measures can be
binding or non-binding, depending on regulatory requirements or
internal corporate policy. The purpose of this study is to chronicle the
history of say-on-pay in the Organisation for Economic Co-operation
and Development (OECD) countries, to compare its implementation by
groups, such as shareholder-initiated or legislated adoption and binding
or advisory votes, to identify the issues associated with say-on-pay, and
to explore the sources and possible remedies for observed deficiencies.

However, determining the effectiveness of say-on-pay is difficult
because there is no single version. Successful shareholder proposals
result in periodic advisory votes to accept or reject the Board’s proposed
executive compensation package. Mandated say-on-pay could include
separate binding or advisory votes on compensation, or it might be part
of the annual report with the votes applying to compensation packages,
incentive plans, or other components, such as severance arrangements,
non-completion clauses, pension agreements, option grants, or approval
of capital authorizations required to meet obligations under share-based
incentive plans. Votes can occur annually or on some other basis, may
cover compensation policy, a compensation report, compensation of
individual executives/directors, or specific elements of the
compensation package, such as share-based compensation. They can
also look forward at compensation to be set in the future or backward
at compensation as executed in the past. The tenets of say-on-pay vary
by country due to political, institutional, cultural, economic, and social
factors that shape local governance and compensation practices. As
table 1 shows, the implementation of say-on-pay varies widely across
the OECD countries. Among the forty-one countries listed in the OECD
Corporate Governance Factbook (2015), twenty-five require disclosure
of firms’ remuneration policies by law or stock exchange regulations,
eight recommend such disclosure, and eight leave the matter open. For
the thirty-one OECD countries with a mechanism for shareholder
approval of compensation policy, fourteen are binding, eleven are

Multinational Journal276

T
A

B
L

E
1

.
O

E
C

D
C

ou
nt

ri
es

w
ith

S
ay

-o
n-

Pa
y

(f
ro

m
O

E
C

D
C

or
po

ra
te

G
ov

er
na

nc
e

Fa
ct

bo
ok

, 2
01

5)

R
em

un
er

at
io

n
Po

lic
y

L
ev

el
/A

m
ou

nt
o

f R
em

un
er

at
io

n

D
is

cl
os

ur
e

Sh
ar

eh
ol

de
r

D
is

cl
os

ur
e

of
In

di
vi

du
al

s*
Sh

ar
eh

ol
de

r
Ju

ri
sd

ic
tio

n
of

P
ol

ic
y

A
pp

ro
va

l
T

ot
al

R
em

un
er

at
io

n
A

pp
ro

va
l

A
rg

en
tin

a
L

So
P/

A
A

L
A

ll
di

re
ct

or
s

So
P/

A
A

A
us

tr
al

ia
L

L
: A

dv
is

or
y

L
T

op
5

A
us

tr
ia

C
So

P/
A

A
C

A
ll

m
an

ag
em

en
t b

oa
rd

m
em

be
rs

So
P/

A
A

B
el

gi
um

L
L

: A
dv

is
or

y
L

L
L

: A
dv

is
or

y
B

ra
zi

l
L

L
: B

in
di

ng
L

H
ig

he
st

/lo
w

es
t p

ai
d

di
re

ct
or

s
L

: B
in

di
ng

C
an

ad
a

L
C

: A
dv

is
or

y
L

L
C

: A
dv

is
or

y
C

hi
le

L
: B

in
di

ng
L

: B
in

di
ng

C
ze

ch
R

ep
ub

lic
L

L
: B

in
di

ng
L

—
L

: B
in

di
ng

D
en

m
ar

k
C

C
: A

dv
is

or
y*

L
—

L
E

st
on

ia
—

—
—

—
—

Fi
nl

an
d

C
C

: B
in

di
ng

*
C

C
E

O
a

nd
to

p
m

an
ag

em
en

t
L

Fr
an

ce
C

C
: A

dv
is

or
y

L
L

L
: T

ot
al

G
er

m
an

y
C

C
: A

dv
is

or
y

L
L

L
: A

dv
is

or
y

G
re

ec
e

—
L

: B
in

di
ng

L
—

L
: B

in
di

ng
H

on
g

K
on

g
R

—
R

D
ir

ec
to

rs
1

—
H

un
ga

ry
L

: B
in

di
ng

—
Ic

el
an

d
L

: B
in

di
ng

L
L

L
: B

in
di

ng
In

di
a

L
/R

—
L

: B
in

di
ng

In
do

ne
si

a
L

C
: A

dv
is

or
y

L
L

C
: A

dv
is

or
y

( C
on

tin
ue

d
)

277Say-on-Pay: Is Anybody Listening?

T
A

B
L

E
1

.
(C

on
tin

ue
d) R
em

un
er

at
io

n
Po

lic
y

L
ev

el
/A

m
ou

nt
o

f R
em

un
er

at
io

n

D
is

cl
os

ur
e

Sh
ar

eh
ol

de
r

D
is

cl
os

ur
e

of
In

di
vi

du
al

s*
Sh

ar
eh

ol
de

r
Ju

ri
sd

ic
tio

n
of

P
ol

ic
y

A
pp

ro
va

l
T

ot
al

R
em

un
er

at
io

n
A

pp
ro

va
l

Ir
el

an
d

R
—

R
—

Is
ra

el
L

L
: B

in
di

ng
L

T
op

5
L

: B
in

di
ng

2

It
al

y
L

L
: A

dv
is

or
y

L
L

L
: A

dv
is

or
y

Ja
pa

n
L

So
P/

A
A

L
A

bo
ve

J
PY

1
00

m
ill

io
n

So
P/

A
A

K
or

ea
L

L
: B

in
di

ng
L

—
L

: T
ot

al
L

ux
em

bo
ur

g
So

P/
A

A
So

P/
A

A
M

ex
ic

o
L

—
L

—
L

N
et

he
rl

an
ds

L
L

: B
in

di
ng

L
L

/C
L

o
r A

A
N

ew
Z

ea
la

nd
L

—
L

A
ny

on
e

>
N

Z
D

1
00

,0
00

N
or

w
ay

L
L

: B
in

di
ng

*
L

—
L

: B
in

di
ng

Po
la

nd
—

—
L

—
—

Po
rt

ug
al

C
L

: B
in

di
ng

C
L

: B
in

di
ng

Sa
ud

i A
ra

bi
a

L
—

L
D

ir
ec

to
rs

/T
op

5
k

ey
e

xe
cs

.
—

Si
ng

ap
or

e
C

—
C

D
ir

ec
to

rs
/C

E
O

/T
op

5
k

ey
e

xe
cs

.
—

Sl
ov

ak
R

ep
ub

lic
C

—
C

—
C

Sl
ov

en
ia

L
So

P/
A

A
L

L
—

Sp
ai

n
L

: A
dv

is
or

y
L

L
L

: B
in

di
ng

Sw
ed

en
L

L
: B

in
di

ng
L

A
ll

di
re

ct
or

s
an

d
C

E
O

L
: B

in
di

ng
Sw

itz
er

la
nd

R
C

: A
dv

is
or

y
L

A
ll

di
re

ct
or

s
an

d
C

E
O

L
: B

in
di

ng
( C

on
tin

ue
d

)

Multinational Journal278

T
A

B
L

E
1

.
(C

on
tin

ue
d) R
em

un
er

at
io

n
Po

lic
y

L
ev

el
/A

m
ou

nt
o

f R
em

un
er

at
io

n

D
is

cl
os

ur
e

Sh
ar

eh
ol

de
r

D
is

cl
os

ur
e

of
In

di
vi

du
al

s*
Sh

ar
eh

ol
de

r
Ju

ri
sd

ic
tio

n
of

P
ol

ic
y

A
pp

ro
va

l
T

ot
al

R
em

un
er

at
io

n
A

pp
ro

va
l

U
ni

te
d

K
in

gd
om

L
L

: B
in

di
ng

L
A

ll
D

ir
ec

to
rs

L
: A

dv
is

or
y

U
ni

te
d

St
at

es
L

L
: A

dv
is

or
y

L
D

ir
ec

to
rs

/C
E

O
/C

FO
/T

op
3

e
xe

cs
.

L
: A

dv
is

or
y

K
ey

:
S

oP
/A

A
=

C
ho

ic
e

of
s

ha
re

ho
ld

er
a

pp
ro

va
l o

r a
rt

ic
le

s
of

a
ss

oc
ia

tio
n

L
=

R
eq

ui
re

d
by

la
w

o
r r

eg
ul

at
io

n
*

=
R

eq
ui

re
d

on
ly

if
fi

rm
u

se
s

in
ce

nt
iv

e
pa

y
R

=
R

eq
ui

re
d

by
li

st
in

g
ru

le
—

=
N

o
sp

ec
if

ic
re

qu
ir

em
en

t o
r r

ec
om

m
en

da
tio

n
C

=
R

ec
om

m
en

de
d

by
c

od
e

or
p

ri
nc

ip
le

N
ot

e:

1
H

on
g

K
on

g
lis

tin
g

ru
le

s
al

so
r

eq
ui

re
f

ir
m

s
to

d
is

cl
os

e
th

e
ag

gr
eg

at
e

co
m

pe
ns

at
io

n
of

th
e

fi
ve

h
ig

he
st

p
ai

d
ex

ec
ut

iv
es

, a
nd

c
od

e
re

co
m

m
en

ds
th

is
d

is
cl

os
ur

e o
n

an
in

di
vi

du
al

b
as

is
. 2

Is
ra

el
re

qu
ir

es
b

in
di

ng
ap

pr
ov

al
fo

r l
ev

el
/a

m
ou

nt
o

nl
y

if
it

is
n

ot
w

ith
in

th
e r

em
un

er
at

io
n

po
lic

y.

279Say-on-Pay: Is Anybody Listening?

advisory, and six allow firms to choose between shareholder approval
of their compensation policies or including them in their articles of
association (the equivalent of articles of incorporation in the U.S. and
Canada). Similarly, the OECD countries differ on whether firms must
disclose compensation amounts for various directors and/or managers,
and whether shareholder approval for specific compensation is binding,
advisory, or optional.

According to Funke (1991), policy problems are complex,
ill-structured problems that do not yield sure answers and cause
disputants to disagree about the appropriate assumptions, theories, or
solutions, each with particular strengths and weaknesses. Say-on-pay
can be considered an ill-structured problem because various parties
disagree about the problem that needs to be resolved and propose vastly
different resolutions. There is no clear goal, set of operations, end
states, or constraints, and there is uncertainty about the preferred
outcome of shareholder votes on executive compensation. In order to
determine the effectiveness of say-on-pay, there must be some
consensus on the nature of the problem and the desired outcome. There
also has to be some consensus on what led to say-on-pay.

II. Background information

A. Excessive compensation leads to say-on-pay

The say-on-pay movement has been fueled by populist anger about
perceived excessive executive compensation (Wilmers, 2014). A survey
by Adamson and Lumm (2009) shows virtually resounding disapproval
by individual investors toward executive pay. According to Gopalan
(2007), when the say-on-pay movement was gathering steam in the U.S.
at the beginning of 2007, “80 percent of Americans believed that
executives were overpaid, and 90 percent of institutional investors
believed that corporate CEOs were overcompensated. More
surprisingly, even a majority of corporate directors, 61 percent, believed
that executive compensation models were problematic.” An analysis by
Valenti (2013) concludes that average total compensation for U.S.
CEOs in S&P 500 firms increased over 725% from 1970 to 2011,
compared to 5.7% growth in worker pay and 9.8% stock market growth.
Average compensation for these CEOs grew to $14.1 million in 2012,
up 8.5% since 2011 and 37.4% since 2009.

However, the U.S. is not the only country where the problem is

Multinational Journal280

politically and economically acute. Compensation levels around the
world have risen dramatically too, and the issue of pay disparity began
in these countries even before the Financial Crisis of 2007-2008
(Crisis), which only served to make it worse. CEO compensation at
large U.K. firms quadrupled over the past twenty years while share
prices have remained effectively flat. In 2010 alone, U.K. CEOs’
median earnings increased 32%, three times the rise in share prices and
well above workers’ 2% average pay increase. The ratio of CEO to
average worker pay was 47:1 in 1998 but had risen to 120:1 by 2010
(Groom, 2011). According to the Expert Corporate Governance Service
(ECGS), after three years of decline, the average total compensation for
French CAC 40 CEOs increased 34% in 2010; pay for German DAX 30
CEOs increased 14% from 2010 to 2011; and Swiss SMI and SPI
CEOs’ compensation increased by 60% from 2002 to 2006. CEOs at
New Zealand’s largest listed firms got a 14% average pay raise in 2010,
whereas the average wage increase for all New Zealanders was just
1.7% and the NZX 50 had only a 2% return that year (Adams, 2011). In
Australia, median CEO salary increased by 33% from 2003 to 2007, the
ratio of ASX 100 CEOs to average workers’ wages rose from 17:1 to
42:1 in 2009, and the top twenty Australian CEOs earned more than 100
times the average wage from 1993 to 2009 (Productivity Commission,
2009). A 2012 report by the Canadian Centre for Policy Alternatives
notes that the top 100 Canadian CEOs received a 27% increase from
2009 to 2010 (Flavelle, 2012), and Swedish Trade Union Confederation
data shows that average income for executives rose to forty-six times
the mean industrial wage in 2010 (Pollard and Koranyi, 2013).
According to data in The State of Working America (Mishel et al.,
2012), most of the countries that eventually adopted some form of
say-on-pay had a percentage change in CEO pay of more than 100%
from 1988 to 2005.

Based on data collected by Bloomberg (Lu and Melin, 2016), figure
1 compares current average CEO compensation in twenty-five of the
largest economies around the world. At $16.95 million average
compensation for S&P 500 CEOs, the U.S. still leads other countries in
executive compensation by a significant margin, but average CEO
compensation in Europe and much of Asia is substantial too.

The escalation in CEO pay has far outpaced wage gains for average
workers (Conyon et al., 2011), which has exacerbated the pay disparity
over time. The ratio of U.S. CEO to average worker pay was 31:1 in
1970, but increased to 263:1 by 2009, reached a high of 525:1 during
the Internet bubble, then shrank to 354:1 by 2012 (Goldstein, 2013), and

281Say-on-Pay: Is Anybody Listening?

FIGURE 1.— Average CEO Pay in $ Millions (based on Bloomberg
data from Lu and Melin, 2016)

is currently 299:1 (Lu and Melin, 2016). Figure 2 shows the most recent
ratios of CEO to average worker pay around the world.

Executive compensation has evolved due to complex economic and
political factors, such as disclosure requirements, tax policies,
accounting rules, legislation, corporate governance, general economic
conditions, and political climate. Many of the changes in compensation
practices can be traced directly to government responses to actual or
perceived abuses, often stemming from isolated events involving a
single company or industry from the U.S. crackdown on compensation
for railroad executives in the early 20th century to the compensation
limits imposed on bank executives during the Crisis.

There is no standard definition for “excessive” compensation.
However, the issue of excessive executive compensation has been called
the most egregious corporate governance failure of the 20th century, and
the trend is continuing (Lavelle, 2002). This view first gained political
momentum in the U.S. in the early 1990s when executive pay packages
grew in excess of $100 million at companies like Global Crossing,
Qwest Communications, Hewlett-Packard, and others.

Exponentially increasing executive compensation has widened the
gap between CEO and average worker pay and reduced
pay-performance sensitivity. In addition, changes in the global

Multinational Journal282

FIGURE 2.— Ratio of CEO Pay to Average Income (based on
Bloomberg data from Lu and Melin, 2016)

economic environment, corporate scandals of the 1990’s and 2000’s,
and corporate governance failures that contributed to the Crisis have
increased scrutiny of executive compensation and calls for greater
reform. Excessive executive compensation has galvanized investors and
produced criticism of the Boards’ lack of management oversight and
apparent failure to tie pay to performance. The public and media have
framed executive compensation as a public policy issue, pushed it to the
political forefront, and spurred governmental intervention (Lewis and
Einhorn, 2009; Schwarcz, 2009; Posner, 2009; Peacock, 2012).

The culture of awarding exorbitant bonuses appears to have spurred
executives to take extreme risks (Balachandran, Harnal and Kogut,
2010), while the practice of giving large severance payments often
rewards rather than penalizes them for such conduct (Bebchuk and
Fried, 2006). Bebchuk and Spamann (2010) attribute managers’
behavior to the high equity component in executive compensation. They
point out that with increased executive pay sensitivity to stock price and
increased stock price volatility, managers may serve the interests of
shareholders through further risk-taking at the expense of other
stakeholders, including bondholders, depositors, the government, and
taxpayers.

Despite global efforts to empower independent Boards in the decade

283Say-on-Pay: Is Anybody Listening?

leading to the Crisis, directors did little or nothing to limit risk-taking
or incentivize executives to do so (Steverman and Bogoslaw, 2008).
Corporate governance was routinely criticized as ineffective by the
press, academics, and even top Federal Reserve officials (Becht, Bolton
and Roell, 2003; Deutsch, 2003) during the corporate scandals of the
1990s and the 2000s and the bursting of the Internet bubble in 2000. In
the U.S., these failures served as catalysts for regulatory changes (e.g.
new governance guidelines from the NYSE and NASDAQ) and
legislative changes (e.g. the Sarbanes-Oxley Act of 2002). In Europe,
similar governance changes, (e.g. the Cadbury Report (1992) in the
U.K., Tabaksblat Report (2003) in the Netherlands, Bouton Report
(2002) in France, and Cromme Report (2002) in Germany) have
followed public disquiet about incidents of actual or perceived corporate
excess and an assessment that various market failures necessitate
intervention. The systematic problems cited include higher cost of
capital stemming from low trust in corporate reporting (Lev, 2003),
short-termism in investment appraisal (Blair, 1995), and social costs
arising from excessive executive salary growth (Charkham and
Simpson, 1999).

Post-Enron, U.S. stock exchange rules and federal legislation were
implemented requiring public companies to have Boards with a majority
of independent directors (unless the company has a 50% shareholder),
as well as audit and compensation committees comprised solely of
independent directors. The move to independent directors began as a
move toward good governance, but it has become an element of
corporate law. Similar rules and best practices have been implemented
in the U.K., France, the EU, and the International Corporate Governance
Network.

Although the Enron-era produced sharp criticisms of executive pay,
the Crisis moved executive compensation from the shareholder agenda
to the regulatory agenda amid concern for financial market stability. The
traditional primacy of shareholder interest in executive compensation
and the link between compensation and profits/growth, however flawed
in its execution, are being challenged by other stakeholders as the
systemic risks from poor compensation structures have become clearer.
Conventional wisdom suggests that when a bubble bursts, scandals
follow, and eventually, new regulation. This has been true since the
South Seas Bubble (Banner, 1997), and most major securities
regulations have come after crashes. The path to say-on-pay has been no
different.

Multinational Journal284

B. Theories of regulation and say-on-pay

Regulation follows two distinct models: the public interest theory and
the special interest theory (Mulherin, 2007). It may be enacted in
response to a market failure (public interest theory) where it is
implemented to improve public good, or in response to various political
support groups (special interest theory). The public interest theory is the
traditional model (Pigou, 1938), but the alternative comes from the
observation that many regulations appear aimed at producer protection,
rather than consumer protection (Stigler, 1971). This paper posits that
say-on-pay follows the public interest theory of regulation because it
has primarily been enacted in response to market failures in order to
improve public good. That is, governments have mandated say-on-pay
to correct excessive executive compensation.

If compensation contracts do not reflect shareholders’ best interests
because they are often determined under sub-optimal bargaining
conditions (e.g. Jensen and Murphy, 1990; Bebchuk and Fried, 2004),
then say-on-pay should alter those conditions in a way that is conducive
to arms-length bargaining, resulting in more efficient contracting
(Bebchuk, 2007). There are two key considerations for how much a firm
benefits from say-on-pay: (1) Firms with excessive or ineffective
executive compensation are more likely to benefit; and (2) Firms with
shareholders willing to vote against management are more likely to see
change. Of course, the composition of the shareholder base may
influence shareholders’ willingness to vote against management. Prior
research documents that institutional investors are less apt to vote with
management on governance proposals than individual investors (Gordon
and Pound, 1993).

Culpepper (2012) says, “It is clear that say on pay is chosen by
politicians to respond to popular outrage about perceived abuses in
executive pay, and the grant of power it entails is certainly limited.”
While there has been a push from the public for change, not all theorists
agree. Indeed, a lack of consensus among theorists that say-on-pay is
needed may be a significant barrier to change. Advocates of optimal
contracting theory argue that there has been little action because there
is no real problem (Core and Guay, 2010). They believe that most
Boards negotiate the best possible CEO compensation arrangements in
order to maximize shareholder value given the underlying contracting
costs. These theorists contend that the existing executive compensation
system is largely working well and that little change is needed to ensure

285Say-on-Pay: Is Anybody Listening?

that shareholders are getting their money’s worth (Dorff, 2007).
Another issue is how to align the interests of managers and

shareholders to incentivize long-term performance. Scholars who debate
the normative desirability of say-on-pay disagree on whether
shareholders have the capacity to use their say-on-pay votes to oversee
managers and Boards effectively (Gordon, 2009; Bainbridge, 2009).
There is also debate over the government’s role in executive
compensation. Political scientists who write about say-on-pay in the
U.S. have been dismissive partly because the vote is not binding, so it
is seen as symbolic politics (Suárez, 2014). Moreover, scholars note that
say-on-pay does not substantially affect managers’ ability to influence
the composition of their own Boards, which is the core of managerial
power in U.S. firms (Cioffi, 2010). Underlying these debates is the
public interest theory-based notion that regulation is needed to correct
inefficient or inequitable practices. This theory of economic regulation
is rooted in the perception that government must regulate markets when
markets are unable to regulate themselves.

C. Historical framework of say-on-pay

Although the U.K. was the first to legislate say-on-pay in 2002, its
origins are in the U.S. proxy rules. In 1992, the Securities and Exchange
Commission (SEC) expanded the scope of allowable topics for
shareholder proxy proposals to include executive compensation issues.
Previously, shareholder proposals were submitted through SEC Rule
14a-8, which regulates the proposals that appear in the company’s proxy
statement and on the proxy ballot. Proposals that interfered with a
manager’s right to conduct the company’s ordinary business were
disallowed, so compensation proposals were rarely included because of
ambiguity in the SEC’s definition of “ordinary business.”

As U.S. public furor over executive compensation grew in the early
1990s, a push was made for regulatory reform. When high CEO salaries
became a bipartisan campaign issue in the 1992 U.S. presidential
election, McCarroll (1992) called CEO pay the “populist issue that no
politician can resist” (Murphy, 1997). Legislation capped the taxable
amount of executive compensation, and late in the 1992 proxy season,
the SEC announced that proposals on executive compensation would no
longer be disallowed. This was concurrent with an expansion of proxy
disclosure requirements, based on the implicit assumption that the
proposal mechanism could be used to initiate change when investors
were dissatisfied with the compensation policies revealed in the proxy

Multinational Journal286

statement. The SEC approved new rules on executive compensation
proposals and disclosure on October 15, 1992. The compensation
proposals were only advisory and the probability of passage was low,
but shareholders finally got the right to participate in the
compensation-setting process. At the same time, massive employee
downsizing by British firms with seemingly excessive compensation
plus a series of corporate governance failures led to intense policy
debates on governance and the appropriate role of shareholders in the
process. The Cadbury Report (1992) included provisions related to the
Board’s compensation committee. These initiatives in the U.K. and U.S.
in 1992 started the global say-on-pay movement.

Executive pay came into the spotlight again in the 2000s after the
end of the Internet bubble, a series of accounting scandals in the U.S.
and Europe, and the option backdating scandal. These events revived
the debate over executive compensation because many of the
scandal-ridden firms’ executives seemed to escape with all of their
compensation intact. In 2002, the U.K. introduced the Directors’
Remuneration Report regulations, which require firms to submit a
compensation report for an advisory shareholder vote at the annual
general meeting. This was the first say-on-pay legislation.

In 2004, the EC recommended the implementation of say-on-pay by
firms in its jurisdiction. The Netherlands, Sweden, Norway, and
Denmark soon enacted say-on-pay legislation following similar
corporate scandals and concomitant public anger. In light of the Crisis
in 2009, the EC targeted directors and executives of financial
institutions in a new recommendation advocating that the structure …