Article

Say on Pay Around the World

Randall S. Thomas and Christoph Van der Elst

Shareholders have long complained that top executives are overpaid by corporate boards irrespective of their performance. Investors have traditionally been powerless to prevent these perceived abuses and have sought a way to gain greater influence over directors’ compensation decisions. Many governments responded by increasing the level of corporate disclosures on compensation packages and policies, and occasionally tinkering with tax policies in efforts to reduce pay levels, but none of these changes has had much impact.

However, investors have continued to put pressure on governments to change the status quo. In 2002, these efforts led the U.K. to adopt legislation requiring public companies to permit their shareholders to have a mandatory, nonbinding vote on the compensation of their top executives (“Say on Pay”). Since that time, there has been a wave of Say on Pay legislation enacted in countries around the world, including the U.S., Australia, Belgium, the Netherlands, and Sweden, and Switzerland. In this Article, we examine these new legislative initiatives carefully and ask why they have been so widely adopted, how effective they are, and whether they are likely to be adopted in other countries.

What is the justification for adopting these rules? The answer to this question turns in large part on the prevailing share ownership structure of corporations in the country in question. For countries where most corporations have dispersed ownership structures, like the U.S., the U.K. and Australia, proponents have claimed that these votes will allow shareholders to 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, and Belgium, the story is more nuanced. The existence of controlling shareholders at most companies in these countries means that there already is close monitoring of executive pay levels by a motivated owner, but several other reasons exist for making these changes.

The effects of Say on Pay votes vary across nations, but several general trends can be identified. We discuss those trends in this Article and provide an overview of the current state of Say on Pay in several countries, including the U.S., U.K., Australia, Belgium, France, Germany, Sweden and the Netherlands. We distill the experiences of these nations to examine why Say on Pay legislation has been adopted, or seems likely to be adopted. Ultimately, we conclude that Say on Pay is here to stay and offer our predictions about the future of this legislation in these and other countries.