Just Say No to "Say on Pay"?

For all the complaining that investors and Foolish analysts do about executive pay, it might come as a surprise that investors rejected two out of the three "say on pay" proposals at pharmaceutical companies' annual meetings this week. Shareholders at both Johnson & Johnson (NYSE: JNJ  ) and Abbott Labs (NYSE: ABT  ) rejected the idea, and Pfizer's (NYSE: PFE  ) investors just barely passed the resolution, with a bit more than 52% in favor.

My guess is that investors figured the proposals, which only give shareholders an advisory role, didn't have enough teeth to make them worth the effort. Maybe, having just experienced Earth Day, investors figured they'd save the paper.

There are probably better ways to get investors' opinions on shareholder pay than a yes/no vote at companies' annual meetings anyway. Amgen created an online survey to get investors' opinions on executive pay, and Prudential Financial (NYSE: PRU  ) has also asked for online comments about pay. Other companies, such as Home Depot (NYSE: HD  ) , have met with shareholders individually or in groups to discuss the issue.

Of course, investors have always had a voice: their sell button. Don't like the pay that the board is bestowing on Starbucks' (Nasdaq: SBUX  ) Howard Schultz or Citigroup’s (NYSE: C  ) Vikram Pandit? Just sell and move on. Or, perhaps, vote out the board members. Remember, shareholders own the company, and the board is supposed to act on their behalf.

"Say on pay" sounds good -- and catchy besides -- which is probably why lawmakers tout it, but the reality of the situation is that an advisory role isn't worth very much. It would certainly be a good start for investors to be able to trust management to increase shareholder value, and the board to pay executives the appropriate amount. If that's not occurring, however, it's probably better for most investors to move on, rather than try and change things from the inside. We can't all be Carl Icahn.

More Foolishness on CEO pay:

Starbucks is a Motley Fool Stock Advisor selection, and the Fool owns some shares. The Home Depot, Pfizer, and Starbucks are Inside Value recommendations. Johnson & Johnson is an Income Investor pick. Try any of these Foolish newsletters today, free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (12)

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  • Report this Comment On April 26, 2009, at 7:02 PM, SlowThought wrote:

    The author (and every public comment on this subject I have seen) misses the point. Yes, "say on pay" is flawed, in exactly the same way that most corporations' bylaws are flawed... the alleged owners have no real power. What corporate America needs is real reform in the way corporate leadership is selected. Today, the CEO nominates the board, and the board supports the CEO. While the shareholders get to vote, many corporations' rules are written such that a board member doesn't need a majority to win an election. X open seats, X candidates handpicked by the CEO, and only a handful of votes required to get them elected. Thanks to the CEO, not the shareholders... any wonder who the board's going to look out for?

    How do we fix this?

    a) National uniform rules governing "public" companies... break the Delaware and Nevada pro-insider monopolies.

    b) These rules should require a MAJORITY of shareholders, or at least a majority of voting shareholders, to support the election of a board member.

    What would this accomplish?

    a) Board members depend on shareholders, and therefore care about shareholders.

    b) CEOs depend on board members and therefore care about board members.

    c) Market forces restore sanity to executive pay and everything else insider.

  • Report this Comment On April 27, 2009, at 4:50 AM, CrazyOtto wrote:

    TMF's attitude of "if you don't like it, just sell and move on" is ridiculous. Reminds me of the "America: love it or leave it" attitude of certain not particularly bright segments of the electorate. In essence, TMF is suggesting that investors should not think of themselves as owners, with the responsibility to improve companies that comes with ownership (e.g. reigning in unjustified and counterproductive CEO pay). The attitude conveyed by TMF here suggests we should all just be traders in shares: don't like company practices, just move on and buy another one. This will not reduce the widespread rot within American corporations, and posses a long term threat to all investors.

  • Report this Comment On April 27, 2009, at 10:43 AM, pondee619 wrote:

    "There are probably better ways to get investors' opinions on shareholder pay ..."

    What is "shareholder pay"? Aren't investors shareholders? My guess is that investors are in favor of shareholders getting paid.

  • Report this Comment On April 27, 2009, at 12:55 PM, Jdbst wrote:

    For the companies listed in this article, Institutionals control 60% to 70% of the outstanding shares.

    These types of proposals do not pass without widespread support from the larger institutional investors.

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