Goldman Sachs and the Case for Say on Pay

Say on Pay does nothing more than give an advisory vote to shareholders on the compensation of top officers.  Even if the compensation is voted down, boards are free to ignore the results.  Yet even this mild right has been sharply resisted by most public companies.  They simply don’t want their compensation practices subjected annually to shareholder review.

Say on pay already exists in Britain.  Shareholders almost never vote down the compensation package.  There are a number of reasons for this, but one of them is that boards regularly talk to, and consult with, their shareholders.  To the extent there is serious criticism or concern, the shareholders can let management know and practices can be fixed before the vote.  Thus, compensation is essentially pre-screened.  Indeed, in Britain, where the practice is to separate the chairman and CEO, the chairman has the responsibility of regularly consulting with shareholders.  In other words, say on pay doesn’t increase hostility; it increases communications. 

The review process probably exercises downward pressure on compensation.  On the other hand, it cuts down on criticism and bad publicity.  In short, management most likely benefits from the advisory vote and the concomitant improvement in communications with shareholders. 

The same thing could easily happen in the US, as Goldman recently demonstrated.  Goldman was potentially on track to pay record amounts of compensation.  The bank visited with large shareholders over the planned amounts and, from public reports, appears to have gotten an earful. 

After the consultation, Goldman announced that it would change the compensation package.  The members of the management executive committee would receive bonuses in stock.  The Company would implement say on pay. 

Had Goldman consulted with shareholders in advance of all the publicity, it might have made exactly the same decisions, but avoided the outrage and bad publicity.  In the future, Goldman will presumably consult first, anticipating the shareholder vote.  In other words, communications with large shareholders on compensation issues will likely become a regular component of Goldman’s practices.  In short, Goldman, which opposed say on pay, has become a convert because it can see the benefits that result from the practice.