48:3 An Efficient “Say” On Executive Pay: Shareholder Opt-in as a Solution to the Managerial Power Problem

Comment

Abstract

There is widespread belief in the United States that executive compensation played a significant role in the collapse of credit markets in 2007 and the subsequent financial crisis of 2008–2009 as managers took excessive risks because they were compensated for achieving short-term results. Yet even before the financial crisis, the structure and level of executive pay at public companies has been a source of intense policy debate in the United States.

The “say-on-pay” provisions of the Dodd-Frank Act of 2010 require all public companies to hold a nonbinding shareholder vote on executive pay at least every three years, beginning in 2011. This Comment argues that Congress could have done better. The managerial power theory of executive compensation holds that executives unduly influence a company’s board of directors in order to extract excess pay. If Congress intended for the Dodd-Frank say-on-pay legislation to combat excessive managerial power as the root cause of excessive managerial pay, it should have provided for public company shareholders to decide (i) whether they want to have a say-on-pay in the first place; and (ii) whether they desire a say-on-pay vote to be binding on the board of directors. Legislation allowing shareholders to “opt-in” to a vote on executive pay is the most efficient response to the managerial power problem because it gives shareholders the ability to adopt say-on-pay only when they believe it will benefit the company.