Is there any doubt which one we investors prefer?

Given the choice between approving executive compensation, even with a comprehensive binding vote, or having a material impact on the BoD, any sane investor would take the latter.

Lately we’ve witnessed extensive debate about say-on-pay, including how investors should vote, what impact the vote has on exec comp, and even whether the vote makes any sense at all. A number of corporate defenders criticize say-on-pay, sometimes in insidious ways, and seek ways for executives and directors to mitigate or even evade the impact of say-on-pay votes. But, in some respects the debate misses a fundamental point.

Sundry and assorted corporate defenders don’t seem to get it, though. They continue to slam say-on-pay as if giving investors a non-binding vote on comp will spell the end of US business.

We investors take an interest in say-on-pay because that’s all we’ve got. Almost any investor with an opinion would relinquish say-on-pay if it means we could select directors in a fair and transparent process.

But, we can’t.

Why do we prefer say-on-directors over say-on-pay? Stated differently, what’s wrong with say-on-pay? Not just say-on-pay in it current, weak, even somewhat comical form, but a fully-binding vote on exec comp? It’s obvious to us, but let’s enumerate the reasons anyway, for the benefit of executives, directors, and their lackeys:

Analyzing on pay is hard: Exec comp these days includes numerous complicated and subtle elements, with the best nuggets buried deep in a dozen or more single-spaced pages and dense tables of a proxy statement. It has ambiguous disclosures, complex estimation formulae, conflicting incentives, arcane tax implications, and obscure yet substantial perks. Even with help, it’s difficult to do well.

Investors lack expertise in exec comp: PMs analyze companies and industries, not individual pay packages. PMs can compare companies with some clarity, but finding and understanding exec comp comparison data requires an entirely different skill set.

Say-on-pay sends a muddy signal: In its current form, say-on-pay requires investors to take a single up-or-down vote on the entire exec comp program as disclosed in the proxy statement. Investors might object to only a single  element of an entire pay package, or almost all elements, yet cast the same vote. Yet, anything more refined, say with separate votes on base pay compared to variable comp, would quickly become unbearably complicated.

Pay votes affect only part of a company’s affairs: An investor might like the structure and payout of the exec comp plan, but loathe the strategy, directors, and executives themselves. A vote in favor thus fails to convey a complete view of a company’s situation.

So, why do we do it? We take advantage of the chance to vote on exec comp because in many instances, we don’t trust the BoD to pay executives the right amounts, in the right ways.

It’s really the board’s job. Investors will do it because the board doesn’t do it, at least well enough.

It’s all we investors have, and for now we’ll take what we can get. Give us proper say-on-directors, and we’ll gladly delegate pay to the BoD.

Serious investors don’t love say-on-pay, but we’ll use it in the absence of any other way to act on a failing investment.

Hmm, let’s see: criticize what little investors have today to influence management incentive, and let CEOs choose their own bosses? Maybe directors, executives, and their advisors do get it after all.