In early 2015 many French minority shareholders made dramatic use of new “say on
ID: 2802981 • Letter: I
Question
In early 2015 many French minority shareholders made dramatic use of new “say on pay” votes, to express their frustrations over high fixed remuneration as well as a perceived lack of transparency about the way bonuses are calculated. Such shareholder activism suggests concerns about both the level of executive pay and how it is decided. Discuss the components of CEO pay, the rationale behind these compensation packages and why encouraging minority investor involvement in such decisions enhances corporate governance practices in corporations
Explanation / Answer
'Say on pay' is a new corporate governance initiative that permits minority shareholders to vote on the suitability or appropriateness of the chief executive and/or other senior managements' compensation. Chief executive remuneration debates made headlines in France and around the world following the first rejection of a Say on pay resolution since the advisory vote on remuneration was introduced in 2013, involving Renault CEO Carlos Ghosn.
Historically, top corporate executives had always been well paid for convincing reasons. Running a major corporation is a demanding job, so one would expect to pay a higher salary to get and retain talented hardworking professionals.CEO remuneration calculations differs considerably from typical salaried or hourly employee pay packages because unlike typical employees, the vast majority of senior management packages is 'contingent compensation' and structured so as to only reward the executive in a scenario where actual positive company performance has taken place and growth in shareholder value is distinctly visible. However, the pay of CEOs at major corporations grew unrealistically and came to average several hundred times the pay of ordinary workers. This necessitated a relook or revisit on the methodology involved. Traditionally, in listed companies, executive compensation used to be determined by a compensation committee composed of board members. With rising shareholder activism, minority shareholders started demanding a role or say in such decisions. Beginning with the UK and then France, the practice is now adopted by many corporations even in the US. Corporate governance, seen in perspective with corporate social responsibility (CSR) makes a strong case for a greater say to minority shareholders in deciding major aspects related to a corporation. Proxy investor advisory services firms have also played a significant role in bringing about this transformation. Many case studies and research reports have indicated improvement in overall corporate governance standards and overall shareholder value considerations due to this.
Say on pay and other forms of shareholder activism is only expected to increase around the world in the years to come.