SEC endorses executive pay rule, then hands off to stock exchanges

March 30, 2011

The near collapse of the financial system in 2008 and the ensuing recession crystallized long-building frustration with executive pay. Not only was it excessive, critics said, but its incentives encouraged reckless risk-taking.

Now, Washington regulators are tackling the issue.

The five members of the Securities and Exchange Commission gave their preliminary endorsement Wednesday to a proposal that would ostensibly require executive pay to be set by independent members of corporate boards.

But the SEC proposed leaving details to another group of rulemakers, the stock exchanges.

The SEC also proposed letting the exchanges carve out major exceptions to whatever independence standards they adopt.

“The proposed rules also would authorize the exchanges to exempt any category of company from all of the requirements of the new compensation committee listing standards,” the SEC said in a summary of its proposal.

The unanimous SEC vote was part of the agency’s effort to implement the sweeping law Congress passed last year to overhaul regulation of Wall Street. Congress mandated that the exchanges be allowed to carve out exemptions.

In a related action earlier this month, the SEC proposed a rule meant to discourage irresponsible risk-taking by preventing top executives at big financial firms from immediately pocketing any annual bonuses in full.

By stretching payouts over a period of years, the SEC is trying keep those executives exposed to any delayed consequences of their actions.

Wednesday’s proposal was part of an effort to ensure that the board members who approve executive pay packages are not beholden to or co-opted by the executives they are paying.

J. Robert Brown Jr., a professor at the University of Denver’s Sturm College of Law who specializes in corporate governance, said the SEC passed up an opportunity to draft standards that would protect investors.

Compared with the SEC, “the stock exchanges are unlikely to write as powerful a set of rules,” Brown said.

The SEC also addressed the independence of compensation consultants — advisers who help corporate boards set executive pay. Some not only advise boards on executive pay but also do other work for the same companies, arguably giving them an incentive to preserve executives’ goodwill.

Doug Friske, global leader of executive compensation consulting at the firm Towers Watson, said the SEC could have spelled out an independence test for compensation consultants but instead affirmed that corporate directors are the ones who make such determinations.

Charles M. Elson, director of a corporate governance program at the University of Delaware, said the proposal and the act of Congress on which it was based would make little difference because they essentially reaffirm the status quo.

“This will have little impact because the committees are already independent and the consultants are already independent,” Elson said.

In other business Wednesday, the SEC commissioners unanimously endorsed a joint proposal by several regulatory agencies that could force some home buyers to make down payments of 20 percent.

The proposal is intended to discourage the kinds of toxic loans that proliferated during the housing market’s bubble years.

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