The financial crisis has sent executive compensation to the top of legislators' agendas, with presidential candidates Barack Obama and John McCain agreeing shareholders could use a bigger megaphone.
The financial crisis has sent executive compensation to the top of legislators’ agendas, with presidential candidates Barack Obama and John McCain agreeing shareholders could use a bigger megaphone.
Proponents of “say-on-pay” want shareholders to be allowed an advisory vote on compensation. It wouldn’t limit what executives could be paid but would let boards know whether investors think the compensation is fair.
Obama supports legislation that requires say-on-pay while McCain wants companies to adopt it voluntarily.
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“If you asked me three weeks ago, I didn’t think it was the highest priority,” says Paul Hodgson, senior research associate at The Corporate Library. “It’s moved up the list because there’s a suspicion — and in my case it’s more than a suspicion — that part of what drove this crisis is the executive-compensation practices at these financial-services companies.”
Hodgson believes implementing say-on-pay would be more effective than letting the government regulate pay. The bailout bill gives the government some control at companies that receive aid, such as capping how large a compensation package can be deducted from corporate taxes.
Companies that aren’t involved in the bailout are allowed to deduct salaries up to $1 million while bailed-out companies can deduct up to $500,000 in salary and all other compensation.
Steven Van Putten, an executive-compensation consultant at financial-advisory firm Watson Wyatt Worldwide, believes the rules in the bailout bill could be introduced as legislation that applies to all companies.
“The train had left the station on this already,” he says. “The train is now going downhill and it’s picking up speed.”
Beware of unintended consequences, Van Putten warns. For instance, past attempts to limit pay — such as the $1 million deduction cap — led to the explosion of stock options.
Hodgson agreed lawmakers should be careful. “I think that would be a big mistake. Legislation surrounding pay levels is not the way to go.”