'Say on pay' is not a 'slippery slope': an advisory vote on executive compensation makes sense for both companies and shareholders. Here are 10 reasons why.

• Author: Wilcox, Jhon C.
• Position: EXECUTIVE COMPENSATION - Interview

SHOULD SHAREHOLDERS HAVE THE RIGHT to an advisory vote on executive compensation? What would be the consequences? These questions have become the defining issue of the 2008 proxy season in the U.S. The predominant tone of the public discourse over advisory votes has been highly confrontational, treating the issue as a struggle for power between companies and shareholders. The unfortunate consequence of this overheated debate has been to obscure the advisory vote's most important benefits--its potential to reduce conflict and promote constructive dialogue between companies and shareholders. An annual advisory vote would likely result in the elimination of most compensation proposals under Rule 14a-8 together with the costs and uncertainties associated with the shareholder proposal process. In addition, over time an annual vote would shift the focus of the compensation debate to individual company practices rather than broad policy issues.

Fortunately, the dialogue at private meetings of companies and institutional investors has been more substantive and nuanced than the public debate. Here is a look behind the scenes at how some shareholders are responding to companies' questions about the advisory vote and the goals of executive compensation disclosure:

1. Is an advisory vote necessary? The goal of an advisory vote is to help ensure that directors pay attention to the elements of compensation that matter most to investors: goals, metrics, philosophy, and links to performance and business strategy. Shareholders generally agree that they don't have the knowledge or inclination to second-guess how or how much senior executives should be paid at specific companies. They want board compensation committees to handle this responsibility, provided they act responsibly and explain their decisions. Shareholders also agree with companies that compensation standards should be flexible, strategic, clear, and not standardized or formulaic. If a company's Compensation Discussion and Analysis (CD&A) makes a convincing case that its compensation program is performance-based and rewards executives for solving business problems and creating long-term value, shareholders will support it even if the amounts paid seem high. Since performance-based compensation implies that exceptional performance deserves exceptional pay, companies should not fear that votes will be consistently negative.

2. If shareholders are given an advisory vote on compensation, won't they...