Say on Pay
What is say on pay?
Say on pay is a term referring to the law in which the shareholders of a company can vote on the compensation of executives and also on general compensation policies. Say on pay votes can be applied to:
- Remuneration packages of executives
- The company’s compensation philosophy
- Grants of equity to executives
- Performance measures related to compensation
- CEOs' remuneration ratio to employees
- Short-term and long-term incentives
The Say on Pay role is supported by corporate law and is a common practice in public companies.
Why is Say on Pay important?
Management is likely to overpay themselves if they have complete control, whether directly or indirectly, over how much they are compensated. Therefore, shareholders and directors are elected to protect the interests of the company. Usually, these decisions are made in an Annual Meeting or a specially set up compensation committee consisting of board members.
How does Say on Pay work?
Shareholders can vote on compensation practices and executive remuneration, making their votes either advisory or binding.
- Advisory vote - An advisory vote allows for shareholders to vote on remuneration-related issues, but the votes do not hold the company to them. It is a way for shareholders to share their views, whether good or bad, regarding executive remuneration and compensation rules.
- Binding vote - In a binding vote, shareholders have a legally binding vote on executive remuneration, compensation policies, and targets for the company.
Different countries have different legislation on the types of Say on Pay.
What are the advantages of Say on Pay?
- Increased transparency - To pre-empt questions, companies are likely to share more information about executive remuneration philosophy or even detailed remuneration information of executives. More information will also be likely shared on performance measures and how they link to remuneration.
- Executive pay structured toward meeting goals - With increased governance, remuneration committees will likely set their compensation strategy to shareholders' interests. In this way, executive pay will have a strong link to performance measures and clear KPIs.
- Increased conversations between the company and shareholders - To ensure an agreement is reached around executive pay, Say on Pay will likely encourage more in-depth conversations between the company and shareholders. In many cases, this provides investors the opportunity to act as a strategic sounding board.
What are the disadvantages of Say on Pay?
- Creates shareholder oversight burden – Asking shareholders to provide input on executive pay places implications on their time and money. It requires concentrated efforts as they sift through details.
- It can adversely affect executive experience – As Say on Pay, in some jurisdictions, allows for shareholder-approved packages and policies only, it can provide a rigid framework for executive compensation package negotiations. It can cause unwanted dissatisfaction and potential executive turnover.
What happens if Say on Pay fails?
A failing vote, which in most instances is less than 50%, indicates that the majority of the shareholders are dissatisfied with executive pay, company performance, or the remuneration philosophy.
It is in the company's best interest to gain feedback from shareholders to make the necessary changes to receive the supporting vote in future years. Continued failed votes could erode shareholder confidence and ultimately affect the company's share price.