In the corporate setting, the CEO and senior executive remuneration is typically determined by the Board of Directors. In many countries, corporate governance codes have been developed to provide guidance on such remuneration practices. However, there has been a recent trend of countries adopting regulation which allows shareholders some form of voting rights on executive remuneration. Such voting rights are commonly referred to as Say on Pay (SoP) votes.
While certain aspects of individual SoP regulations may differ – for example, votes can be binding or nonbinding – they are generally instituted with the aim of incentivising boards to act in the interests of shareholders and to avoid awarding executives excessive pay packages.
SoP first appeared in the UK in 2002, when the Directors’ Remuneration Report Regulations required all UK companies listed on major exchanges to hold non-binding SoP votes on executive compensation annually. In 2013, regulations were updated to give shareholders a binding vote.
In the US, SoP was introduced as part of the Troubled Asset Relief Program (TARP) in 2009 when companies with outstanding financial assistance loans were required to hold SoP votes. With the enactment of the Dodd-Frank Act in 2011, all public companies are now also required to hold non-binding SoP votes.
Evidently, SoP is becoming increasingly commonplace. According to a 2013 report by the Hay Group, 12 of 16 major jurisdictions studied – including Australia, the UK and US – had some form of SoP legislation in place.