Say on Pay Six Years On: Lessons from the UK Experience is a thought-provoking examination of the six-year history of advisory shareholder votes on executive compensation in the UK recently released by pension investment manager Railpen and proxy advisor PIRC.
The document is intended to be instructive. Its primary stated purpose is to bring the benefit of UK experience with ‘say on pay’ to US market participants, who are likely to find pay votes on virtually all public company ballots in the near future. Shareholders of a baker’s dozen of Canada’s senior issuers will start to vote say on pay resolutions early in 2010, so the analysis is also highly relevant to Canadian investors.
Say on Pay Six Years On catalogues an impressive list of the positive governance developments that its authors attribute to the annual pay vote process. On the investor side, shareholders have been compelled to develop a deeper understanding of all aspects of pay plans and policies in the marketplace. Equipped with greater knowledge, they are better able to engage with companies where they see room for improvement. An annual vote provides participants with a timeline, but it is just one part of an ever-improving process of communication and negotiation between investors and companies.
Say on Pay Six Years On is not an impartial document. The authors are strong proponents of the vote even as they argue that past experience in the UK points up several matters that have not been, but must be, addressed by shareholders and public companies in order that it “remain relevant and current”.
They identify three issues in need of consideration as future votes are cast on pay. The first is the ‘quantum question’ of appropriate pay levels. Issuers and most shareholders have not shown great interest in asking ‘how much is too much?’ as paycheques continued to rise at the UK’s largest companies after the vote was introduced. Similarly, the vote has not become an occasion for the consideration of relative levels of pay in the corporate world, the growing ‘pay gap’ between top executives and ‘average’ employee remuneration. Finally, corporate responses to significant votes against on pay have not always suggested an acknowledgement of calls for change. Some have suggested that the government should add some mandatory features to the vote that would require companies to report back to shareholders on specific modifications to compensation schemes in the wake of a significant vote against pay policy and practices.
For Canadian investors, the challenges and rewards of ‘say on pay’ all lay directly ahead, but resources such as the Railpen/PIRC document can give us an important head start when we begin assessing its impact as the votes are tallied in 2010 and beyond.
By Laura O’Neill, Director of Law and Policy