New on FinoLib · Volume II: Capital Markets
I have just published a new article on FinoLib, my free finance education library: Say-on-Pay, Compensation Committees and CFO Hiring. It is part of Volume II: Capital Markets. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
7.5 Say-on-Pay and Compensation Committees
The idea in plain words
An independent compensation committee designs executive pay, and shareholders get to vote on it. The vote is advisory in the US, binding on the pay policy in the UK, and in India binding through special resolutions above the Companies Act section 197 limits. Even an advisory vote has teeth: the proxy adviser ISS reviews the committee after support falls below 70%, and the UK Code expects a response when 20% oppose.
Key points
■US say-on-pay (Dodd-Frank, from January 2011) is held at least every three years and does not bind the board.
■UK quoted companies may not pay a director outside an approved policy (Companies Act 2006, s.226B).
■Indian special resolutions need 75% of votes cast, so pay can be blocked by about a quarter of the vote.
A closer look
Executive pay design is delegated by the full board to a dedicated compensation committee, composed entirely of independent directors, specifically to remove any conflict of interest from executives effectively setting their own pay. In most major markets, shareholders also vote on executive pay, but the force of the vote differs. In the US, the Dodd-Frank Act (SEC Rule 14a-21, from the first annual meeting on or after January 21, 2011) requires a say-on-pay vote on named executive officers’ pay at least once every three years, and the statute says the vote does not bind the board.
Decision rule
Treat support below 70% of votes cast (below 80% at a UK-listed company) as a failed vote, whatever the law says about binding effect. Before the next proxy statement, meet the largest holders that voted against, remove the feature they objected to, and disclose what changed. If insiders hold a large block, judge the result on outside votes: with insiders casting 20% for, a 20% overall “no” means 0.20 ÷ 0.80 = 25% of outside votes.
The costliest mistake
Ignoring a failed vote because it is “only advisory.” The cost moves to the directors: early in the 2025 season, average support for director nominees at companies whose prior-year say-on-pay fell below 50% was 460 basis points lower than where support topped 70% (Semler Brossy). In the UK the cost is mechanical: a failed report vote forces a binding policy vote at the next accounts meeting. Source: Semler Brossy, 2025 Say on Pay Reports (May 2025).
7.6 CFO and Other C-Suite Hiring — Who Actually Decides
The idea in plain words
The CEO normally chooses the CFO, and the board formally appoints or ratifies the choice, usually after the audit committee has met the candidate. The board stays involved because the CFO personally certifies every quarterly and annual report under Sarbanes-Oxley Section 302, and is subject to the mandatory clawback. Signing your name to the numbers makes this hire different from the others in the C-suite.
Key points
■A new principal financial officer triggers a Form 8-K within four business days.
■Under Delaware law, officers are chosen as the bylaws or board prescribe, so the board resolution, not the press release, shows who decided.
■The emergency plan should name an acting principal financial officer who can sign the next certification.
Decision rule
Let the CEO choose the CFO, but give the audit committee a veto: if the committee has not interviewed the final candidates and confirmed that the CFO will have direct, private access to its chair, do not ratify. For other C-suite roles, board ratification of the CEO’s choice is enough unless the role carries a regulatory sign-off (chief risk officer at a bank, chief compliance officer), where the relevant committee should interview too. An interim chief accounting officer pending a search can skip the veto.
The costliest mistake
Treating the CFO as the CEO’s personal hire, accountable only upward. The finance chief is the officer whose job includes saying no to the CEO. At WorldCom, the SEC’s complaint of June 26, 2002, alleged that line costs were moved to capital accounts: about $3.055 billion in 2001 and $797 million in the first quarter of 2002, a total of 3.055 + 0.797 = $3.852 billion of expenses reported as assets. Section 302 certification followed two months later.
Recap
The CEO chooses the CFO and the board appoints or ratifies the choice, because the CFO personally certifies every periodic report and is subject to the clawback. The audit committee should interview finalists, keep private access to the CFO and plan for an acting principal financial officer.
What the full article covers
In the full article I take you through these sections:
■7.5 Say-on-Pay and Compensation Committees
■7.6 CFO and Other C-Suite Hiring — Who Actually Decides
It includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, Say-on-Pay, Compensation Committees and CFO Hiring, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance