New rule tries to rein in the pay of corporate executives

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A rule passed Tuesday lets investors vote on executive pay as often as once a year.

Problem is, companies don’t have to abide by the votes.

The Securities and Exchange Commission ruled that companies must hold shareholder votes on their executives’ pay at least once every three years, and as frequently as every year if shareholders want it. Congress required such “say-on-pay” votes in last year’s financial overhaul package but left it to the SEC to work out the timing and other details.

The rule also gives shareholders the right to vote on so-called “golden parachutes” given to executives when they leave companies.

Say-on-pay is a victory for investor advocates who hope it will make a dent in what they say is runaway executive compensation. But all votes are nonbinding, meaning corporate boards remain free to pay executives whatever they like.

Still, proponents say companies will listen to shareholders because of the controversy over executive compensation.

“It’s a step in the right direction,” said David DeBoskey, an accounting professor at San Diego State University. “It’s nonbinding but companies are under tremendous pressure to adhere to the votes.”

Not every investor advocate is so sanguine.

Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said involving shareholders in pay decisions will intrude on the authority of directors and actually could limit their ability to negotiate for lower pay.

Instead, he said, dissatisfied investors should simply vote out directors who approve exorbitant pay packages.

“It’s a step that just doesn’t get us anywhere,” Elson said. “It’s more theater than effective and it may be counterproductive.”

-- Walter Hamilton