Should Shareholders have a Greater Say over Executive Pay?: Learning from the US Experience

Abstract

Executive pay arrangements in Britain's publicly quoted companies have been subjected to much criticism in recent years. Proposals that shareholders should have a greater direct say over managerial remuneration have been a byproduct of the concerns expressed. Debate on this point, however, has been largely speculative. This is because there is little evidence available in the UK indicating how shareholders would exercise any new powers they might be given. This paper addresses the evidentiary gap by drawing upon the experience in the United States, which offers much potentially valuable data. In the United States, the two primary circumstances where shareholders vote on executive pay issues are where a stock option plan is put forward for approval and where a shareholder proposal has been made pursuant to US securities laws. Empirical studies reveal that American investors use the powers they have in a discerning fashion. At the same time, though, shareholder voting probably only operates as a potential check when pay arrangements deviate far from the norm. With respect to Britain, these findings imply that implementing the shareholder-oriented reforms that have been canvassed recently would fail to address fully the concerns raised by critics of executive pay.