The Impact of Shareholders on Executive Pay

Abstract

Those who own shares of stock in a company are called shareholders. As such they are in part owners of the company. Typically, stock of large companies is in the hands of institutional investors: mutual funds, private money managers, and public sector pension funds. It is the latter who are long-term investors. Stock is typically sold on a stock exchange (such as the New York Stock Exchange). Shareholders elect members of the company’s board of directors and vote on other matters needing their vote. The 2010 Dodd Frank Act requires that companies submit to shareholders a non-binding vote on executive pay. Since shareholders seek an appreciable return on their investment, they are interested in tying executive pay to shareholder value (stock price and dividends). Shareholder watchdogs review and comment on proposed company actions including executive compensation and anti-takeover devices. Shareholders have a high interest in executive benefits and short as well as long-term incentives. More specifically, they do not like: payouts based on internal goals (ignoring shareholder value); restricted stock awards not tied to performance; stock option reloads; omnibus plans; stock options without performance factors; and evergreen plans.