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House OKs Executive Pay Legislation

The bill would allow shareholders to cast an annual nonbinding advisory vote on executive comp packages and allow a vote on golden parachute pay deals when a company is being bought or sold.

April 20, 2007
Related Topics: Corporate Culture, Compensation Design and Communication, Latest News
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A bill that seeks to give shareholders more influence in setting compensation levels for corporate executives was approved by the House of Representatives on Friday, April 20, but faces cloudy prospects.

The House passed the bill 269-134, with 55 Republicans joining 214 Democrats in support of the legislation. It was opposed by 129 Republicans and five Democrats.

The bill would allow shareholders to cast an annual nonbinding advisory vote on executive compensation packages. It also would allow a nonbinding vote on “golden parachute” pay arrangements when a company is in negotiations to be bought or sold.

Although it sailed through the House, there is no similar bill percolating in the Senate. In addition, the Bush administration opposes the measure.

Proponents say the legislation addresses what they call runaway executive pay. In recent months, individual CEO compensation totaling hundreds of millions of dollars has generated controversy about the chasm between executive remuneration and that of middle- and lower-level employees.

It also has raised concern about CEO pay consuming resources that could otherwise be used for business investment.

“This is a bill to further the workings of the capitalist system of the United States,” said Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, during the House floor debate. “All we say is this: The shareholders own the companies, and we believe the shareholders should be allowed to vote.”

The Bush administration argues that executive pay disclosure rules promulgated by the Securities and Exchange Commission, which went into effect this year, should be given a chance to work. It also says corporate boards and their compensation committees have become more independent.

“Recent enhancements in corporate governance and disclosure have strengthened the executive compensation decision-making process of boards of directors,” the administration said in a statement.

Frank praises the SEC disclosure requirements and says that his bill enhances them.

“The SEC has said that it does not have the power to go further and compel corporations to allow the owners to vote,” he said. “Our bill simply does that.”

Both the White House and House Republicans argue that the bill represents a federal intrusion into the compensation process.

“It mandates, it requires, it obligates every publicly held corporation in this country to take a vote on its top executives,” said Rep. Spencer Bachus, R-Alabama and ranking member of the House Financial Services Committee.

Several Republican amendments were voted down. They included measures that would exempt the shareholder vote requirement for companies whose boards are elected by majority vote and for companies whose executive pay does not exceed by 10 percent or more the pay at comparable firms or across the industry.

Another amendment would have required the SEC to study whether a shareholder vote would hurt a company in recruiting executives.

Republicans tried to avoid being labeled as defenders of burgeoning executive salaries.

“I’m all in favor of the shareholder vote, if it’s done without the mandate from Washington,” said Rep. Tom Price, R-Georgia.

A company in Price’s state, insurer Aflac, has voluntarily instituted shareholder voting on pay.

Frank rejected the idea that the bill would be a burden to corporate America.

“We made an effort to make this bill minimally intrusive,” he said. “The shareholders own the company. They are the market. All this bill does is empower them.”

Democrats also asserted that a shareholder vote on pay would help rein in excesses that infuriate the average employee, whose real wages have generally stagnated or grown slowly.

“The American worker is not getting enough credit for the growth of the American economy,” said Rep. Brad Miller, D-North Carolina.

—Mark Schoeff Jr.

 

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