Document Type

Article

Publication Date

3-18-2014

Abstract

This Article proposes the adoption of employee say-on-pay in corporate governance. The board would benefit from an advisory vote of employees on executive compensation. This proposal is based on two considerations: firstly, the benefits of better monitoring and reduced agency cost in corporate governance; secondly, the link between executive compensation and income inequity and wealth disparity in the broader economy.

If adopted, shareholders and employees would monitor executive performance and pay at different levels. Shareholders through the market mechanism can only monitor at the level of public disclosures and share price. Employees can leverage private information. Non-executive managers in particular can better monitor the company and senior executives, based on inside knowledge and a longer term horizon, than diffuse, diversified, and short durational shareholders. Employees collectively possess the corporation’s entire information content; the assessment derived there from would be relevant to the board’s assessment of executive performance and pay.

On the level of political economy, employee approval would legitimate executive pay in the current social, economic, and political environment in which executive compensation and income disparities have touched public consciousness. Executive compensation is no longer purely a matter of private contracting. Prominent economists have linked excessive pay to economic inequity, a pressing issue of public consciousness today. Employees are a major constituent of the corporate system and our political society. They can act as surrogate public monitors and perform a gatekeeping function of good corporate governance. Structured properly and achieved fairly as to the executive, employee say-on-pay would politically legitimate executive compensation and income disparity at both the firm and political levels.

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