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House Passes Say-on-Pay Bill, Seeks to Curb Excessive Risk

July 31, 2009
Related Topics: Financial Impact, Compensation Design and Communication, Latest News
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Before heading into a monthlong recess, the House of Representatives passed legislation on Friday, July 31, that would give shareholders an annual, nonbinding vote on executive compensation and allow federal regulators to curb incentive pay.

The bill, approved largely along party lines, 237-185, is similar to a measure that made it through the House in 2007 but was not acted upon by the Senate before the end of the congressional term.

It’s unclear what the Senate will do this time. Observers say that it might include a so-called say-on-pay provision in a broader financial regulation measure later this year.

In addition to mandating the shareholder vote on compensation, the House bill would prohibit any incentive pay structure that “encourages inappropriate risks” that “could threaten the safety and soundness of … financial institutions or could have serious adverse effects on economic conditions or financial stability.”

The provision would apply to financial companies with assets of $1 billion or more regardless of whether they have accepted federal bailout funds. Another part of the bill would require corporate compensation committees to be composed of independent directors.

Proponents of the bill argued that it gives shareholders an opportunity to rein in excessive executive pay, an issue that has stoked anger among voters following the $700 billion government rescue of failed financial institutions last fall.

A July 30 report by New York Attorney General Andrew Cuomo shows that the nine original recipients of bailout funds spent nearly $33 billion on bonuses in 2008.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” the report states. “But even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance.”

Republicans asserted that the House bill goes too far in correcting the problem and would usher in excessive government control of pay packages.

“It is the government that is empowered,” said Rep. Spencer Bachus, R-Alabama and the ranking Republican on the House Financial Services Committee. “Government bureaucrats do not know what is best for America. Are we going to have every bonus submitted to some government agency?”

But Democrats accused Republicans of ignoring the problems caused by excessive risk in the financial system.

Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, said the bill would not allow the Federal Reserve, the Securities and Exchange Commission or any other regulator to set pay. Rather, it would allow them to ensure that risk incentives don’t undermine the markets.

“There has to be balance to the risk-taking,” Frank said. “We want an alignment of risk. The Republican position … is to do nothing.”

A Republican alternative that would have authorized a nonbinding shareholder vote every three years, allowed shareholders to opt out of such votes and deleted the risk-based pay provisions was voted down, 244-179.

Having the government determine whether compensation is inappropriately risky sets a dangerous precedent, according to Timothy Bartl, senior vice president and general counsel of the Center on Executive Compensation.

“You have the federal government superseding the judgment of the compensation committee,” said Bartl, whose organization is sponsored by the HR Policy Association and has issued its own recommendations for addressing risk.

The say-on-pay provision also would be detrimental, Bartl said, because it could create a situation where boards make pay decisions based on what package is likely to draw the most votes.

“That may not be in the best long-term interests of the company or its shareholders,” Bartl said. “This boils down to the question of how do you encourage and succeed in obtaining a sound link between pay and performance.”

—Mark Schoeff Jr.

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