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The beginning of 2011 was marked with the implementation of the Dodd-Frank Act’s “Say-on-Pay” provisions. The new Say-on-Pay provisions shift the balance of decision making in organizations and require that shareholders approve changes in executive compensation and changes in organizational structure affecting executive pay. The goal of this paper is to review the “Say-on-Pay” provisions and their impact on companies. Personal thoughts are included.
Executive pay has always been one of the most contentious issues in organization research. During the recent financial turmoil, executive compensation became a matter of acute political concern. While thousands of employees were losing their jobs, executives were using their position to accumulate additional material resources. The Dodd-Frank Act’s “Say-on-Pay” provisions became the turning point in the development of executive-shareholder relationships. From now on, shareholders will have to approve changes in executive pay and organizational changes affecting executive compensation. The “Say-on-Pay” provisions will greatly affect the amount of compensation and the nature of compensation plans provided to public company executives. The “Say-on-Pay” provisions will necessitate greater compliance with shareholder opinions and requests, leading to increased shareholder engagement and raising the question of shareholder competence in the context of executive compensation issues.
“Say-on-Pay” Provisions: The Basics
The beginning of 2011 became the turning point in the development of business relationships among shareholders and executives. On January 21, 2011 the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed, with the goal of reducing the public pressure on companies and resolving the issue of executive compensation. Pursuant to the “Say-on-Pay” provisions, public companies in the United States must “hold the Say-on-Pay and the Say-on-Frequency votes at the first annual shareholders’ meeting occurring on or after January 21, 2011” (Harris, Mecenas & Poerio, 2011, p.1). In other words, public companies are required to disclose executive compensation plans to shareholders. Shareholder will have to approve or reject these compensation plans during meetings that occur no less frequently than every three years. Shareholders will also have to approve the frequency of these meetings, no less frequently than once in six years. In case of a merger, acquisition, consolidation or any other change in organizational struture, a shareholder advisory vote will have to confirm such organizational arrangements (Lee & O’Neill, 2010). Needless to say, the discussed provisions will have far-reaching implications for public companies and their strategic decisions. From now on, public companies will have to consider shareholder views and opinions regarding the changes and decisions that can potentially affect their dividends and voting position.
Say-on-Pay Provisions: Potential Impacts
The new “Say-on-Pay” provisions will profoundly impact all public companies in the U.S. Executive pay will undergo dramatic alterations under the influence of the “Say-on-Pay” advisory votes. The nation’s leading executives will have their compensation and benefits at stake, and shareholders will play the key role in defining the boundaries of executive pay in public companies (Orol, 2010). Under the new “Say-on-Pay” provisions, some directors and executives may lose their positions: “if boards fail to persuade shareholders that the compensation plans they are providing to CEOs are sensible then, going forward, directors could lose their seats to shareholder nominees because they are not being responsive” (Orol, 2010). From the financial perspective, public companies will have to reconsider their compensation plans and make sure these plans are approved by shareholders. Consequentially, public companies will have to become more sensitive to shareholder concerns and seek greater compliance with the rules and provisions of the Dodd-Frank Act.
From the legal standpoint, the “Say-on-Pay” provisions are believed to be the first successful step towards federalizing executive compensation. The “Say-on-Pay” provisions change the nature and direction of the executive pay process, and they will cause the most significant impact on executive compensation than any other law (Bachelder, 2010). For many years, the federal government used securities laws and taxation mechanisms to regulate the amount of executive compensation provided to public company executives (Bachelder, 2010). Today, the Dodd-Frank Act turns federal law into the principal source of governance and rulemaking in the context of executive pay. Given that Boards of Directors are no longer empowered to make independent decisions with regard to executive compensation, shareholders can expect them to become more compliant with the “Say-on-Pay” provisions: this is the only way for Board members to retain their executive positions.
“Say-on-Pay&rdqquo;: Reflections and Concerns
The significance of the “Say-on-Pay” provisions for the development of public companies in the U.S. can hardly be exaggerated. However, the discussed law is not without controversy. On the one hand, the “Say-on-Pay” provisions shift the balance of forces in the decision making landscape, making shareholders stronger with respect to executive pay decisions. Simply put, the provisions of the Dodd-Frank Act encourage and facilitate shareholder engagement in executive compensation decisions. On the other hand, there is no clarity as for how these vote provisions are to be implemented. For example, shareholders can decide on whether the say-on-pay vote is to take place once in one, two or three years. Yet, how to present this proposal and hold the process remains unclear. Should public companies distribute a multiple-choice survey among shareholders or offer their recommendations and ask shareholders to agree or disagree? There is no answer to this question.
The shift in executive decision making to shareholders raises the question of shareholders’ competence when dealing with executive compensation issues. Do shareholders have sufficient training to understand the complexity of strategic issues faced by executives and develop the most relevant compensation plan? Can shareholders achieve the most reasonable balance of pay and motivation among Board members? It is possible to assume that, in their striving to reduce executive pay by all possible means, shareholders may willingly or unwillingly discourage the most prospective executives from being members of the executive team. The “Say-on-Pay” provisions have the potential to improve the financial standing of public companies through greater shareholder engagement and empowerment. Simultaneously, the provisions require professional considerations and major improvements, to avoid problems with executive motivation and performance.
The beginning of 2011 became the turning point in the development of shareholder relationships with public companies. The new “Say-on-Pay” provisions of the Dodd-Frank Act shift the balance of decision making in executive pay to shareholders. From now on, public companies must disclose executive compensation plans and have them approved by shareholders. The new law empowers shareholders to participate in executive compensation decisions but raises the question of shareholders’ competence in the context of executive pay strategies. The provisions require professional considerations and major improvements, to avoid problems with executive motivation and performance.