Professor Bainbridge on “Say on Pay”

Say on Pay Myths

(From I just read a very important paper, challenging the mythology that has grown up around say on pay.Larcker, David F., McCall, Allan L., Ormazabal, Gaizka and Tayan, Brian, Ten Myths of 'Say on Pay' (June 28, 2012). Available at SSRN:

Abstract:Say on pay is the practice of granting shareholders the right to vote on a company’s executive compensation program at the annual shareholder meeting. Under the Dodd-Frank Act of 2010, publicly traded companies in the U.S. are required to adopt say on pay. Advocates of this approach believe that say on pay will increase the accountability of corporate directors and lead to improved compensation practices.

In recent years, several myths have come to be accepted by the media and governance experts. These myths include the beliefs that:

1. There is only one approach to “say on pay.
2. All shareholders want the right to vote on executive compensation.
3. Say on pay reduces executive compensation levels.
4. Pay plans are a failure if they do not receive high shareholder support.
5. Say on pay improves “pay for performance.
6. Plain-vanilla equity awards are not performance-based.
7. Discretionary bonuses should not be allowed.
8. Shareholders should reject nonstandard benefits.
9. Boards should adjust pay plans to satisfy dissatisfied shareholders.
10. Proxy advisory firm recommendations for say on pay are correct.

We examine each of these myths in the context of the research evidence and explain why they are incorrect. We ask:

* Should the U.S. rescind the requirement for mandatory say on pay and return to a voluntary regime?

Readers familiar with my work on say on pay will not be surprised to learn that my answer to that question is no. See, e.g.,Remarks on Say on Pay: An Unjustified Incursion on Director Authority. Available at SSRN:

Proponents of H.R.1257 or similar federal legislation entitling shareholders to vote on executive compensation must carry their burden of proving three distinct claims: First, that there is an executive compensation problem justifying legislative intervention. Second, say on pay is an effective solution to the problem. Third, that any such legislative intervention should be imposed at the federal level.

If any of these claims fail, the case for a federal say on pay law collapses. In these remarks, I hope to demonstrate that none of the three holds up to close examination.

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