“Say on pay” seems like one of those “chicken soup” ideas — at best salutary and at worst unobjectionable. Who could object to letting the shareholders vote on executive pay?
Minor Myers, for one, in The Perils of Shareholder Voting on Executive Compensation. He suggests that “the more involved shareholders are in a firm’s managerial decisions, the more difficult it is for directors to be held accountable for the outcome of those decisions.” The shareholder vote, he argues, will insulate directors’ compensation decisions from shareholder outrage, which might otherwise have served as an important discipline. He “proposes amending the [say on pay] legislation to allow firms to opt-out of the say on pay regime by shareholder vote. This preserves the benefits of say on pay for those firms where shareholders wish to retain it and allows other firms to exit the regime at little cost.”
This proposal makes some sense. Myers cites evidence indicating that some firms gain and others lose from say on pay. In other words, some firms find that they benefit more from holding directors solely responsible for managerial pay than by having the (mostly disengaged) shareholders take responsibility. Indeed, Myers’ theory suggests say on pay may be a boon to greedy managers.
Although Myers would amend say on pay to make it optional, one wonders why the rule would be necessary at all. State corporation law already provides for something like an opt-in regime by authorizing charter amendments on this issue. Myers argues that opt-out is better than opt-in because the equilibrium under the opt-in alternative would be driven by managerial opportunism. But given shareholder inertia, I’m not persuaded the equilibrium under opt out would be any better.
In any event, the rationale for federal interference in state corporate law is the need for federal minimum standards. If say on pay is no longer a minimum standard — if, like other corporate governance provisions it is just another default rule, with costs and benefits that vary from firm to firm — then why should it be a federal rule?
Myers’ analysis suggests that say on pay is, at best, one possible decent default rule, suitable for some firms. If that’s the best rationale we can come up with, then it’s hard to see why we shouldn’t have federal say on all other corporate governance — in other words, a full-fledged optional federal corporate law. Such a law could include a say on pay opt-in. Or we could have an opt-in federal corporate law with opt out say on pay. We could call such a statute say on say on say on pay.
Or we could just forget the whole thing.