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Ten Myths of 'Say on Pay'

Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-26

12 Pages Posted: 27 Jun 2012 Last revised: 3 Jul 2014

David F. Larcker

Stanford University - Graduate School of Business

Allan L. McCall

Stanford University - Graduate School of Business

Gaizka Ormazabal

University of Navarra, IESE Business School

Brian Tayan

Stanford University - Graduate School of Business

Date Written: June 28, 2012

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?

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Keywords: say on pay, executive compensation, equity awards, equity compensation, performance-based pay, executive pay, corporate governance

JEL Classification: G3, G30, G34, J33, M4, M14, M52

Suggested Citation

Larcker, David F. and McCall, Allan L. and Ormazabal, Gaizka and Tayan, Brian, Ten Myths of 'Say on Pay' (June 28, 2012). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-26. Available at SSRN: https://ssrn.com/abstract=2094704

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Allan L. McCall

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States

Gaizka Ormazabal

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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