Wikipedia Deep Dive

Say on pay

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In 2012, shareholders at Citigroup did something that would have been unthinkable a generation earlier: they rejected their chief executive's pay package. Vikram Pandit had been granted retention bonuses valued at nearly twenty-eight million dollars, and fifty-five percent of voting shareholders said no. It wasn't binding. Citigroup could ignore it entirely. But the message was unmistakable.

This is the strange world of "say on pay"—a system where the people who technically own a company get to voice their opinion on how much the people running it should earn. It sounds like democracy. It functions more like a strongly worded letter.

The Problem Say on Pay Tries to Solve

To understand why shareholders voting on executive compensation matters, you need to understand who actually controls the money in a large corporation.

In theory, shareholders own the company. They elect a board of directors to represent their interests. That board hires executives—the chief executive officer, the chief financial officer, and other senior leaders—to run the business day to day. And somewhere in that chain of delegation, someone has to decide how much those executives get paid.

Here's where it gets complicated.

The board of directors typically handles executive compensation through something called a compensation committee. But the executives themselves often have significant influence over who sits on that board. They work closely with directors, build relationships, and can subtly shape the composition of the very committee that sets their pay. This creates what economists call an "agency problem"—a situation where the people making decisions aren't necessarily acting in the best interests of the people they're supposed to serve.

Think of it like asking someone to set their friend's salary, knowing their friend will help decide their salary next year. Human nature being what it is, the numbers tend to drift upward.

This isn't some cynical theory. Executive compensation at large American companies has grown enormously over the past several decades, rising far faster than worker wages, company profits, or stock performance. By the early 2000s, stories of lavish pay packages—golden parachutes worth tens of millions for departing executives, bonuses that seemed disconnected from company performance—had become regular features in business news.

The British Experiment

The United Kingdom became the pioneer in addressing this problem. British company law originally had a simple approach: shareholders themselves set director pay at company meetings. This was the default rule under legislation dating back to 1862. Over time, however, most companies shifted that power to the directors themselves. The practical result was executives increasingly controlling their own compensation.

In 2002, the UK introduced mandatory "say on pay" voting. Under Section 439 of the Companies Act 2006, shareholders at every publicly traded British company must vote on director compensation at their annual meeting. Directors are required to disclose their pay packages in a formal "Remuneration Report," and failure to do so results in fines.

The vote is advisory. Directors can technically ignore it. But there's a catch that gives the system teeth: British shareholders have an unrestricted right to fire any director with reasonable notice. If a board ignores shareholder sentiment on pay too brazenly, those shareholders can simply vote the directors out.

The UK went further than just advisory votes on overall pay. Share-based compensation schemes must be approved by ordinary shareholder resolution. Long-term incentive plans require binding shareholder approval under the UK Corporate Governance Code. Employment contracts lasting more than two years need shareholder blessing. And so-called "golden parachutes"—lavish payments to departing executives—are prohibited except in specific circumstances like fulfilling existing contractual obligations or pension commitments.

The results have been mixed but notable. In 2003, shareholders at GlaxoSmithKline voted narrowly against a twenty-two million pound package for their departing chief executive. The chairman dismissed the opposition as simply a cultural difference with American practices. But the vote made headlines worldwide and signaled that shareholders could mobilize effectively when compensation seemed excessive.

America Catches Up

The United States took longer to embrace say on pay, and it took a financial crisis to get there.

In 2007, Representative Barney Frank of Massachusetts, then chairman of the House Financial Services Committee, sponsored legislation giving shareholders an advisory vote on executive compensation. The bill passed the House of Representatives. Senator Barack Obama introduced parallel legislation in the Senate. It stalled.

Then came 2008.

The financial crisis that nearly collapsed the global banking system changed everything. The Emergency Economic Stabilization Act of 2008 created the Troubled Asset Relief Program, better known as TARP, which provided hundreds of billions of dollars to rescue failing financial institutions. As a condition of receiving this government money, companies had to give shareholders a say on executive pay.

The logic was straightforward: if taxpayers were bailing out these companies, the people who owned shares in them should at least get to weigh in on how much the executives who ran them into the ground were being paid.

Treasury Secretary Timothy Geithner pushed the concept further in 2009, announcing that companies receiving exceptional financial assistance would face mandatory say on pay votes. By June of that year, the Obama administration signaled its support for extending this requirement to all public companies, not just those receiving bailout funds.

The result was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Section 951 introduced say on pay as a permanent feature of American corporate governance. Every publicly traded company in the United States must now give shareholders a non-binding vote on executive compensation.

How It Actually Works

The mechanics of say on pay are deceptively simple. At a company's annual shareholder meeting, alongside votes on board members and auditors, shareholders vote on the company's executive compensation packages. The resolution typically asks whether shareholders approve of the compensation paid to named executive officers as disclosed in the company's proxy statement.

In the United States, this vote is advisory. The board of directors is not legally required to change anything based on the outcome. A company could theoretically receive ninety percent opposition and proceed with the same pay packages.

In practice, that rarely happens.

A failed say on pay vote is a public relations disaster. It signals that the people who own the company—institutional investors, pension funds, individual shareholders—believe management is overpaying itself. Media coverage is inevitable. Activist investors take notice. The company becomes a target for governance campaigns. Directors who ignore a failed vote risk being voted out themselves at the next election.

The threat is often more powerful than the reality. Most companies pass their say on pay votes by comfortable margins. In 2012, only 2.6 percent of companies holding such votes failed to receive majority support. But that small percentage includes some dramatic cases.

When Shareholders Revolt

Nabors Industries, an oil and gas drilling company, failed its say on pay vote in both 2011 and 2012. In the second year, seventy-five percent of voting shareholders opposed the compensation packages. The concerns centered on high chief executive pay combined with generous severance arrangements that seemed disconnected from company performance.

Hewlett-Packard failed in 2011 after shareholders objected to the employment agreement negotiated with incoming chief executive Léo Apotheker—a package that looked especially problematic given the company's declining stock price.

Citigroup's 2012 failure remains one of the most prominent examples. The bank had received massive government assistance during the financial crisis. Its stock had collapsed. And yet the board awarded chief executive Vikram Pandit retention bonuses worth nearly twenty-eight million dollars. Shareholders, perhaps remembering that they had essentially been forced to bail out the company just a few years earlier, voted fifty-five percent against.

The United Kingdom has seen its own shareholder rebellions. In 2003, shareholders at Royal & Sun Alliance voted twenty-eight percent against retention bonuses and severance pay for executives whose performance had coincided with a dropping share price. At ITV, forty percent opposed a fifteen million pound payoff to the departing chairman—a payment the company justified by claiming the chairman would have sued if it wasn't paid.

The Swiss Take It Further

While the American and British systems rely primarily on advisory votes, Switzerland took a more aggressive approach.

On March 3, 2013, Swiss voters approved a referendum—by nearly seventy percent—that gave shareholders complete control over executive compensation at publicly listed companies. This wasn't just advisory voting. Swiss shareholders must now elect all members of a company's remuneration committee. They receive annual votes on every board member. And importantly, banks can no longer cast votes on behalf of other shareholders, a practice that had previously diluted individual shareholder power.

The Swiss system represents the logical extreme of say on pay thinking: if shareholders own the company, shareholders should actually control executive compensation, not just offer opinions about it.

Australia's Two-Strikes Rule

Australia found a creative middle ground.

Under the Corporations Amendment Act of 2011, Australian companies face what's called a "two-strikes" rule. If twenty-five percent or more of shareholders vote against the directors' remuneration report at two consecutive annual meetings, the entire board must stand for re-election within ninety days.

This transforms an advisory vote into something with real consequences. Directors don't have to change compensation packages based on a single failed vote. But if they ignore shareholder concerns and face similar opposition the following year, they risk losing their positions. The system creates powerful incentives for boards to respond to shareholder feedback without making every vote an immediate crisis.

The European Approach

The European Union moved more cautiously. A 2002 expert report explicitly declined to recommend mandatory say on pay voting across member states, noting that the effects of such votes could vary significantly between different national legal systems.

That changed in 2017 with the Shareholders Rights Directive II. European Union member states had until June 2019 to implement new requirements forcing companies to have their remuneration policies approved by shareholders. The compensation of each director, both executive and non-executive, must be specified in accordance with these policies.

The stated goal was eliminating business practices based on short-term gains—a recognition that executive compensation structures can encourage risky behavior when they reward immediate results over long-term stability.

Germany, traditionally cautious about interfering with corporate governance, recently amended its Stock Corporation Act to introduce non-binding say on pay votes for German companies.

Does Any of This Actually Work?

Academic research on say on pay effectiveness tells a complicated story.

Brian Cheffins of Cambridge University and Randall Thomas of Vanderbilt University predicted early on that say on pay might prevent sudden dramatic increases in executive compensation but would not stop the general upward drift in pay levels over time. The evidence largely supports this view. Executive compensation has continued rising in most developed economies, even after say on pay provisions were implemented.

Other researchers found that say on pay provides limited useful information to boards of directors. A failed vote tells the board that shareholders disapprove of compensation not being aligned with performance—but boards presumably knew that already. The vote doesn't reveal what specific changes shareholders want or what pay level would be acceptable.

A study examining say on pay implementation across fourteen countries found that it did not increase the market value of shareholder voting rights for the average company. However, the effects varied significantly based on how the rules were structured. Stricter binding systems, like Switzerland's, appeared to increase the value shareholders placed on voting rights. Looser advisory systems, like the American model, actually seemed to decrease that value.

This makes intuitive sense. An advisory vote that companies can ignore is worth less than a binding vote they must obey. The mere existence of a say on pay mechanism may even reduce shareholder power if it creates the appearance of accountability without the reality.

The Critics Have a Point

Critics of say on pay raise several legitimate concerns.

First, the policy is inherently reactive rather than proactive. Shareholders vote on compensation packages after they've already been negotiated and often after they've been paid. If a chief executive received a thirty million dollar bonus last year, voting against the package this year doesn't give the money back.

Second, most shareholders lack the expertise to evaluate complex compensation structures. Modern executive pay involves base salaries, annual bonuses tied to various performance metrics, stock options with different vesting schedules, restricted stock units, pension benefits, deferred compensation, and numerous other elements. Understanding whether a particular package is reasonable requires detailed knowledge of the company's performance, its peer group, retention concerns, and compensation market dynamics. Most individual shareholders simply don't have this information.

Third, say on pay may actually undermine the authority of boards of directors. The board's compensation committee is supposed to make these decisions based on deep familiarity with the company and its executives. If shareholders can effectively override those decisions, boards may become more focused on what will pass a vote than what's actually best for the company.

Finally, advisory votes may create a false sense of shareholder empowerment. When ninety-seven percent of companies pass their say on pay votes, it's easy to conclude the system is working. But that high passage rate might simply reflect companies setting compensation at levels they know shareholders will accept, regardless of whether those levels are actually appropriate.

The Deeper Question

Behind all the mechanics and statistics lies a more fundamental question: who should actually decide what executives get paid?

The traditional answer is the board of directors. Boards exist precisely to make these decisions on shareholders' behalf, bringing expertise and judgment that dispersed shareholders can't easily replicate. This is why corporate law places so much emphasis on board fiduciary duties—directors are supposed to protect shareholder interests, and compensation decisions are part of that responsibility.

But the agency problem is real. Directors are often executives themselves, either at the same company or others. They understand the arguments for generous compensation packages because they benefit from similar packages. They're reluctant to vote against pay proposals when they'll be asking for similar approval for their own compensation elsewhere. The professional and social networks that produce corporate boards also produce a kind of solidarity that can override strict fiduciary analysis.

Say on pay represents a compromise: shareholders get a voice, but not final authority. The board retains decision-making power, but must explain itself publicly and face shareholder judgment. It's democracy with training wheels.

Whether that compromise is adequate depends largely on what you think the problem actually is. If excessive executive pay results from boards being captured by management, giving shareholders a stronger voice helps correct the imbalance. If excessive pay results from broader market dynamics—companies competing for executive talent by offering ever-larger packages—then say on pay addresses a symptom rather than the disease.

What Comes Next

The trend is clearly toward more shareholder involvement, not less. Binding votes, once considered radical, are becoming more common. The Swiss referendum demonstrated that voters will support dramatic expansions of shareholder power when given the chance. European Union directives continue pushing toward greater shareholder rights.

At the same time, executive compensation continues rising. The gap between chief executive pay and average worker pay remains enormous by historical standards. Failed say on pay votes make headlines, but they remain rare exceptions.

Perhaps the most honest assessment is that say on pay does what governance reforms usually do: it makes the existing system work slightly better without fundamentally changing its nature. Boards still set executive pay. Most packages still pass. But the requirement to justify compensation publicly, face shareholder votes, and potentially suffer the embarrassment of rejection does seem to create some restraining influence at the margins.

Whether that's enough depends on how outraged you are about executive compensation in the first place. For those who believe the current system produces reasonable results, say on pay provides useful accountability. For those who believe executive pay has become disconnected from any reasonable measure of value, say on pay is an elaborate mechanism for doing very little.

The shareholders at Citigroup in 2012 voted against Vikram Pandit's pay package. The bank acknowledged the vote. Later that year, Pandit resigned. His departure package was reportedly much smaller than originally negotiated.

Did the shareholders' vote cause that outcome? It's impossible to know for certain. But someone on the board was clearly paying attention.