Say on Pay Around the World

Abstract

Shareholders have long complained that top executives are overpaid by corporate directors irrespective of their performance. Largely powerless to stop these practices, in 2002, they prevailed upon the U.K. Parliament to adopt legislation requiring public companies to permit their shareholders to have a mandatory, non-binding vote on the compensation of their top executives (“Say on Pay”). Since that time, there has been a wave of such legislation enacted in countries around the world, including the U.S., Australia, Belgium, the Netherlands, and Sweden, while Switzerland, Germany and France appear to be moving rapidly in the same direction. In this article, we ask what is the justification for adopting these rules?

For countries where most corporations have dispersed ownership structures, like the U.S., the U.K. and Australia, proponents claimed that these votes would allow shareholders to more stringently monitor management and thereby reduce the agency costs of the separation of ownership and control in public companies. In concentrated ownership countries, such as the Netherlands, Germany, Sweden, France and Belgium, the existence of controlling shareholders at most companies in these countries means that there already is close supervision of pay levels by a concentrated owner with strong incentives not to overpay executives. However, we argue that there are other compelling reasons why Say on Pay has been enacted in these nations.

We find several other reasons for these changes: movements at larger public companies toward increased dispersion of ownership in several of these countries that are opening up a need for an alternative monitor of executive pay; strong support of such legislation by foreign institutional investors whose ownership interests in firms from these countries has increased dramatically in recent years; social pressures in many of these countries against rising levels of income inequality; political responses by left-leaning parties to these social pressures by introduction of Say on Pay legislation; and the presence of important state-owned enterprises in some of these countries that allows the state to play an important role in the regulation of executive pay using different techniques, including Say on Pay. On balance, these arguments have carried, or seem likely to carry, the day in each of the countries we examine.

We conclude by examining existing evidence on the effects of Say on Pay votes and how it is likely to evolve over time.