Say on pay

Posted by Marc Hodak on April 21, 2007 under Executive compensation | Comments are off for this article

Well, the Democrats have fulfilled on their populist promise to “do something” about CEO pay with the new “Say on Pay” bill passed yesterday. It’s difficult for me to add anything beyond what I already wrote when this bill was first proposed a few weeks ago, or the able commentaries of Professors Ribstein, Bainbridge, and Smith. But this is an economics, as opposed to a legal, blog, so I will make it really simple:

This bill, if passed into law, will politicize decision-making on executive compensation at public companies. Politicized decisions are rarely better decisions, so investors will suffer.

If Congress had any integrity about this proposal, the most they would do is to require all public companies to give actual shareholders the choice about adopting a “Say on pay” policy at the company level, which many companies are already doing. This measure is supposed to be for the benefit of the shareholders, right? The fact that the Democrats are choosing, instead, to end-run shareholders perfectly able to vote for themselves with a top-down, Federal law gives you a clue as to who the real intended beneficiaries are.

Anyone who believes that investor-run public companies are better than board-run public companies should invest in North Dakota firms, or in firms that have adopted their own shareholder-vote proposals, and leave the rest of us investors to choose which governance models work for us.