Corporate Governance and the Problem of Executive Compensation: The International Response to the Compensation Problem (Lessons for the United States)

The plans proposed by the British government must be approved by Parliament. They have already met with criticism both by opposition politicians for not going far enough and business interests who think the proposals go too far.

Yet they represent a compromise that stopped short of the recommendations of the High Pay Commission. The government did not propose an expansion of the "closed" system to include employees. Nor did the government propose to give shareholders a binding vote on compensation. Instead, shareholders only got the right to a binding vote on compensation policies.

The authority will make the compensation process more complicated and limit the board's ability to quickly and materially change the formula for determining compensation. But assuming the policies approved by shareholders are broad, boards will still have considerable discretion in determining compensation. The reforms, therefore, will probably not have a substantial impact on the amount paid to executives.

Nonetheless, the reforms will temporarily take pressure off the government. The British government can assert that the reforms should be given some time to work. To the extent, however, the reforms do not temper the escalating nature of executive compensation, public pressure for additional and more intrusive reforms will continue to build.

What does this suggest about the United States? A memorandum put out by Wachtel Lipton noted the proposals and had this to say: "We find these proposals troubling, and discourage them traveling across the Atlantic and becoming seriously considered in the United States. . . ."

The experience in the UK could be a harbinger of things to come in the United States. Say on pay in the US looks like it will cause the board to more closely align compensation with performance, the same thing that happened in the UK. But, as the UK example shows, this alignment does not automatically reduce the escalation of compensation. For that to occur, as we have noted, the fiduciary obligations of the board need to change and the standard for reviewing compensation decisions made more exacting. See Returning Fairness to Executive Compensation.

To the extent these reforms do not slow the escalation of compensation, continued pressure will build, as it did in the UK, for further reforms. As in Britain, it will only occur after additional abuses and further public pressure on politicians. Moreover, by then, the reforms in Britain will have been in place for a period of time, providing empirical information for the reforms that could be adopted in the United States.

J Robert Brown Jr.