What are "Say on Pay" Rules?

In the corporate world, “say on pay” rules are rules which allow shareholders an opportunity to vote on compensation packages offered to company executives. Such rules are not present in all countries, but in those where they are, “say on pay” policies can be either binding or nonbinding. Nonbinding rules are generally deemed weaker by critics of corporate governance, for obvious reasons.

The idea behind “say on pay” is that it acts as a check on corporate executives. Executives are, by nature of their jobs, allowed to make determinations about their own compensation. While they also have a fiduciary duty to the parent corporation to conduct the company's financial affairs in a way which will generate profit for the shareholders, the temptation to take some extra compensation can be enticing nonetheless, especially if an executive believes that it will not hurt the company.

If a corporation must abide by “say and pay” rules, shareholders must be allowed to vote on proposed compensation packages. These include salaries, bonuses, and benefits such as health plans, company cars, housing, and other perks. Shareholders are sometimes surprised to learn about the considerable benefits which may be offered to top executives, including free premium tickets to sporting events, opportunities to use the company's jet, and other benefits which might not seem directly related to the business of running the company.

Shareholders can determine that compensation is not reasonable and vote it down. If the resolution is binding, the company must abide by the vote and adjust the terms of the contract to satisfy the concerns of shareholders. One of the goals behind “say on pay” is that executives will be nervous about particularly audacious compensation packages and too embarrassed to submit them to a vote, which means that they will propose more modest and appropriate packages in order to achieve a vote of approval.

In the United States, “say on pay” was one of the terms put forward for companies which participated in the Troubled Assets Relief Program (TARP) which was developed in response to the 2008 financial crisis. By law, companies which participated in this program had to provide their shareholders with an opportunity to vote on whether or not to adopt “say on pay” rules. Unsurprisingly, the American public greeted this with delight, while corporations protested vehemently, and some companies decided not to participate to avoid the restrictions on compensation structured into the TARP legislation.