What is Say on Pay?
How does say on pay work?
What are the essential elements you should know!
In this article, I will break down the notion of Say on Pay so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let me explain to you the meaning of Say on Pay and why it’s important!
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What Is Say on Pay
Say on pay refers to a process mandated by law whereby the shareholders of a corporation vote on the executive compensation and remuneration of key stakeholders.
In other words, “say on pay” is the legal ability given to shareholders to participate in and decide on the company executive remuneration.
The company executives that are typically targeted are the CEO, CFO, COO, CTO, and other highly compensated executives.
Say on Pay Objective
Since company executives have the overall power to decide on compensation and remuneration, there have been many instances where corporate executives overpaid themselves while exercising their general management power.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced the Say on Pay provision to combat executive excesses.
The Dodd Frank Say on Pay is a corporate law rule where a mandatory and nonbinding (or binding depending on the regulatory requirement) shareholder resolution is offered by the company management to its shareholders and investors asking them to approve their executive compensation package.
Here are some examples of instances that triggered shareholder revolt against the amount executives received in compensation:
- In July 2001, shareholders did not approve of Sir Chris Gent’s compensation of 13 million pounds
- In May 2003, shareholders voted against the 22 million pound bonus and stock severance package of Jean-Pierre Garnier in GlaxoSmithKline
- In June 2007, many shareholders voted against the 11.5 million pound bonus of Sir Terry Leahy’s salary as the CEO of Tesco
Proponents And Critics
Proponents of “Say on Pay” state that shareholders are given the ability to oversee high-level executive decisions on compensation and have a stronger relationship with the company board of directors who must properly exercise its fiduciary duty on the question of compensation.
Critics of the Say on Pay reform argue that the process tends to reinforce short-term assessment of compensation and performance instead of building compensation plans and packages that foster long-term shareholder returns.
Say on Pay Rules
The say on pay rule was created by law with the objective of reducing excessive payments, compensation, and remuneration made to company CEO’s, executives, and other key stakeholders.
Over the years, there was a tendency for company executives to get unreasonably high compensation, salaries, bonuses, perks, and other financial benefits.
In an attempt to prevent company executives from getting overpaid, corporate laws were adapted to create the say on pay rule where shareholders are given the ability to vote and decide on the payment or remuneration of executives.
There is an SEC Say on Pay Investor Bulletin where the Office of Investor Education and Advocacy provides helpful information to investors to understand the rule about shareholder votes and Say-on-Pay.
Say on Pay Vote
The way say on pay works is that corporations and most public companies are required to set up a board of trustees who is given the task of evaluating and determining the proper level of compensation for the company executives.
Once the proper level of compensation for the top executives is determined, the say on pay voting takes place periodically to ensure that shareholders are given the chance to voice their opinion on the proposed compensation and general compensation policies of the corporation.
In very large corporations, a compensation committee composed of corporate board members will generally determine the executive compensation and remuneration.
According to the ISS reports, 4.7% of proposed pay packages relating to S&P 500 companies have failed in 2021, representing an increase of 2% from 2020, and 1.5% in 2019.
Say on Pay Frequency Vote
Further to the Dodd-Frank Act, corporations are required to hold a non-binding Say on Pay frequency vote every six years where shareholders are asked about the “frequency” holding say on pay votes.
Shareholders have the option to choose a Say on Pay voting frequency of:
- Every year
- Every two years
- Every three years
In most cases, however, companies opt for a yearly say on pay frequency where shareholders decide on the executive compensation package.
So there you have it folks!
What does “say on pay” mean?
Is say on pay mandatory?
Say-on-Pay is an advisory shareholder vote on a corporation’s compensation decisions and policies related to its executive officers.
Say on Pay results from excessive executive compensations and payouts seen over the years leading to the introduction of a new rule mandated under the Dodd-Frank Act.
In essence, large companies are required to disclose how their top executives get paid and how their compensation has been taken into account further to the result of the latest say on pay vote.
The objective with the say on pay is to ensure that high-level executives do not use their general power and authority in setting unreasonable and excessive compensation packages for themselves.
Further to the Say on Pay Rule, shareholders are given an advisory vote to decide on how much company executives are to be compensated.
I hope you now have a better understanding of what say on pay means, why this rule has been adopted, and how it works.
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