Section 951: Shareholder Vote on Executive Compensation Disclosures
The other major executive compensation provision within the Act is Section 951: Shareholder Vote on Executive Compensation Disclosures. The major premise behind this is section is that no less frequently than every three years, any proxy/solicitation materials issued by any public company must include a separate resolution on three issues: (1) The shareholder approval of the issuer’s executive compensation; (2) The shareholder approval of the issuer’s executive compensation as it relates to any acquisition, merger, consolidation, proposed sale or any other disposition of assets; and (3) a vote on whether these exact resolutions should take place every 1, 2 or 3 years. The key, quizzical point behind these resolutions is that (1) and (2) are completely and utterly non-binding in any and all form. That is, despite the great lengths Congress has gone to dictate this mandatory rule allowing a shareholder vote on both executive compensation and any “golden parachute” compensation, the result of any such vote will mean absolutely nothing. Unfortunately, this cyclical calamity is the perfect “nutshell” representation of Congress, as a whole.
Obviously, a number of the same arguments used to attack the ineffectiveness of section 953’s needless and repetitive disclosure provisions and doubly applicable here. Most savvy or institutional investors fully understand the need for competitive executive compensation packages (in either cash or equity) and, moreover, they understand that “golden parachute” provisions are primarily for the protection of the shareholders, not their detriment. Put simply, there are incentive problems with any executive compensation plan – be that in cash-based or incentive-based executive compensation structures. Cash-based managerial compensation can produce incentive problems by encouraging managers to be too risk-averse. Conversely, the salaried manager is less likely to strive for a maximization of the stock price, given the long-term career detriment that he/she might suffer if the risk does not pay off. A highly diversified shareholder may benefit from the larger amount of risk, so creating policy that discourages the ability to diversify in some risky investments, is detrimental in some applications.