Should investors have a say on what CEOs are paid?
The premise: Those companies which adopt a ‘say on pay approach’ are better led, perform well and have lower costs, so says research from business school INSEAD.
Associate Professor Economics and Political Science, INSEAD
We found that a say on pay does indeed pay off across multiple dimensions (in a paper published in the Review of Finance, ‘Say Pays! Shareholder Voice and Firm Performance’).
Our analysis, which covers 250 cases of proposals to adopt the say-on-pay policy between 2006 and 2010 – before shareholder votes on pay were mandatory in the US – shows that if the policy was adopted, say on pay increased shareholder value by about five per cent. We also show evidence that say on pay has a positive impact on firms’ accounting and operational performance in the years following the vote.
By giving shareholders a channel to express their opinions, it intensifies board monitoring and pressure on the CEO to improve performance. It can also affect the current level and structure of executive pay, making it more closely tied with performance.
National president Australian Investors Association
Shareholders have a wide range of investing, corporate and management skills, but I expect that the typical investor most likely has a minimum of these skills.
Since these ‘average’ shareholders have little ability to determine an appropriate remuneration package for a CEO, it’s difficult to imagine a mechanism where shareholders could have a credible input into such matters.
Having said that, it is certainly appropriate to call out the extremes. This is not some formal arrangement for ‘having a say’, but the investing community can certainly recognise an excess when presented with one, and may be active and vocal at annual meetings and the like.
My view therefore is that shareholders should not be given any formal arrangement to control CEO remuneration, but they may have a voice through the annual meeting process.
Research director Ownership Matters
I think they should have an influence but not the final say. In a large listed company, you have to strike a balance between allowing shareholders to have their views heard and them actually having a final say.
The areas where I think shareholders should have an absolute say is around the allocation of their equity to executives. As a shareholder, you have a fundamental right to a share in the company. We used to have quite good rules in Australia for dealing with insiders’ capacity to get their hands on shares without paying the market price.
Those rules have basically been gutted over the last 10 to 15 years. Now you see the curious thing of large listed companies spending tens of millions of dollars of their shareholders’ money to buy shares for their executives without shareholders having any binding say on it at all.