Directors’ role at center of "say on pay’ debate

The long-running debate over “say on pay” is heating up in Washington, with a group representing executives saying that the proposal undermines the role of directors while an investors’ group counters that it makes boards more accountable to shareholders.

The Obama administration two weeks ago threw its support behind say-on-pay, proposing that the Securities and Exchange Commission be given the power to mandate non-binding shareholder votes on executive compensation at publicly traded companies.

That would take a key responsibility out of the hands of board members, who are elected for their expertise, said Charles Tharp, executive vice president for policy at the Center on Executive Compensation, a Washington-based organization that represents senior human resources executives at some of the largest U.S. corporations.

“The board should be in the position of having responsibility and accountability” for making compensation decisions,” he said.

“The more you have change in the roles of what shareholders do, versus what the board does, the risk is you’re eroding corporate structure,” Mr. Tharp added.

Allowing shareholders to vote on compensation may encourage boards to abdicate their responsibility to make decisions about executive pay packages and instead turn to outside consultants, said Timothy Bartl, vice president and general counsel of the Center on Executive Compensation.

That could force directors to take a cookie-cutter approach to setting compensation rather than adopting policies that are best suited to their particular companies, he said.

DIFFERING VIEWS

The Washington-based Council of Institutional Investors, which represents pension funds and other big investors, supports the say-on-pay proposal.

Say-on-pay votes would make company directors more accountable, said Amy Borrus, deputy director of the Council of Institutional Investors.

“The point isn’t to vote down executive compensation plans,” she said. “The point of advisory votes is to spur dialogue between investors and boards, and to make boards more thoughtful about how they structure compensation plans.”

Some executive compensation experts think that say-on-pay is likely to prevail.

“To me, that’s a done deal,” said Susan O’Donnell, managing director in the Southborough, Mass., office of New York executive compensation consulting firm Pearl Meyer & Partners LLC.

Now that companies receiving Troubled Asset Relief Program funds are required to allow say-on-pay votes, it is only a matter of time before the requirement is expanded to include all public companies, she said.

“Nobody’s going to escape this,” Ms. O’Donnell said.

On June 10, the Obama administration nixed a previously announced $500,000 salary cap for executives at firms receiving significant amounts of money from TARP and appointed a pay czar to review, reject and set pay levels.

Treasury Secretary Timothy Geithner also released much-anticipated guidelines that clarified executive compensation rules passed by Congress in February as part of the stimulus bill.

Two days later, the Center for Executive Compensation released its own set of best practice guidelines, the “Resource Guide on Executive Compensation Policy.”

LONG-TERM INCENTIVES

In that report, the Center for Executive Compensation said that annual salary and bonus payments to executives should be balanced with such long-term incentives as stock or stock options.

In the total mix of compensation, annual salary and bonuses should be less than the long-term incentives paid to that executive, Mr. Tharp said.

“If you look at some of the compensation arrangements that are viewed as overly risky, they are too focused on the annual incentive without a balance on long-term sustained performance,” he added.

Executives should also be re-quired to retain a portion of the stock that they receive, and all pay packages should include a so-called clawback that would require executives to return compensation if the performance of a company is re-stated downward, according to the report from the Center for Executive Compensation.

E-mail Sara Hansard at [email protected].