When Congress first considered giving shareholders a nonbinding vote on executive compensation -- "say on pay"-- we were skeptical. One of our concerns was that the votes would be meaningless. The other concern was that "say on pay" might prove harmful.
Congress made "say on pay" part of the 2010 Dodd-Frank financial reform law. On Tuesday, 55 percent of Citigroup's shareholders voted against a 2011 compensation plan that awarded CEO Vikram Pandit $14.9 million. Citigroup was the largest company to get a thumbs-down. The vote debunked some of our original worries and confirmed others.
The goals of "say on pay" are to invigorate shareholder participation in corporate governance, to rein in excessive CEO pay and to reduce executives' incentives to chase short-term profits. On balance, "say on pay" does appear to be jump-starting a conversation between corporate boards and their shareholders.
Few companies can afford the negative publicity of a "no" vote, even if legally they may ignore it. The net result is that prudent companies must invest in communication with their shareholders and their compensation analysts. The fact that only 41 out of the Russell 3000 companies suffered "no" votes last year suggests that the system is working.
Citigroup's mistake was to try to pay Pandit and others more than could be justified by the company's performance. Citi flunked the Federal Reserve's most recent bank stress test, and its total shareholder return was down 44 percent over the last year.
Nevertheless, the jury is out on whether "say on pay" reduces CEO incentives to take risks for short-term profits -- the major threat that high pay might pose to the financial system. Shareholders, and the analysts they rely on, continue to emphasize companies' stock prices as a benchmark of executive performance.
Meanwhile, another unintended consequence of "say on pay" has been lawsuits against companies that exercised their statutory right to enact pay plans despite "no" votes. Most of those suits failed, but they cost money to defend.
So far, though, "say on pay" is promoting better corporate governance.
