Shareholders Cut CEO Pay in Backlash
(NEW YORK) -- Amidst a climate of populist outrage and corporate missteps, shareholders are voting en mass to cut executive pay thanks to a new government rule called "say on pay." The board of directors, who determine CEO pay, don't have to listen to the shareholder vote but most of them are listening.
Sprint CEO Dan Hesse received a $3.25 million pay cut after shareholders expressed concern with a deal Hesse cut with Apple to carry the iPhone on the Sprint Network. The deal will cost Sprint $15.5 billion and the Sprint will reportedly not profit from the move until 2015.
But are "say on pay" shareholder votes, while non-binding, a helpful feedback tool or do they encourage Monday morning quarterbacking?
"I think that there is the risk of a knee-jerk reaction," said Wayne Guay, an accounting professor at the Wharton School of Business. Critics of "say on pay" argue that shareholders don't read proxy statements and are less likely to make an informed decision.
Supporters of the policy say that if a CEO can expect an unscrutinized "golden parachute," he or she may have more of an incentive to engage in risky short-term behavior.
But some experts point out that underperforming CEO's are already punished because many of them own a large amount company stock.
Still, compensation packages are often generous enough to offset the loss in stock value. The most famous example was in 2008 when executives from Lehman Brothers collected $483 million in compensation before the company went under in a bankruptcy that is credited with starting the recent financial meltdown. Without worthless stock options, Lehman's CEO Richard Fuld still made close to $350 million.
"It's risk-free for the individual [the CEO] but it's risky for the company," said Rep. Barney Frank, D-Mass., back in 2009 while the law was being debated. "And when you accumulate risks for companies, it's risky for the economy," said Frank.
When big companies fall, like they did in 2008, there is often a domino effect that takes down other companies that rely on their business.
Will "say on pay" have a long-term positive effect?
The rule has been in effect for only one year here in the U.S. but the law was adopted in the U.K. in 2002.
One study on the U.K. system done by a professor from the Columbia Business School and one by a professor at the University of Southern California found that their system encouraged an enhanced dialogue between the board and shareholders. Those shareholders were most likely to punish a CEO by objecting to a generous severance package. When the boards ignored the "say on pay" vote, the next vote was almost always lopsided against the board.
The boards in the U.K study almost always capitulated after the third vote.
Here in the U.S., say on pay is likely too new to be able to assess the effects.
JPMorgan Chase CEO Jamie Dimon last week apologized immediately and profusely for the company's trading fiasco that reportedly cost the company $3 billion. "We made a terrible egregious mistake. There's almost no excuse for it," said Dimon on NBC's "Meet the Press."
Two days after the apology, 91.5 percent of the company's shareholders voted to approve of Dimon's $23 million pay package. However, many of those votes were likely submitted before the trading fiasco was disclosed.
Copyright 2012 ABC News Radio