House Panel Approves Bill to Cut Incentive Pay at Banks
Compensation Practices Leading to 'Inappropriate Risks' Are Targeted

By Jesse Westbrook
Bloomberg News
Wednesday, July 29, 2009

The House Financial Services Committee approved legislation Tuesday that would let regulators ban incentive pay at banks and give shareholders a vote on bonuses in response to public outrage over Wall Street compensation.

The bill, adopted 40 to 28, would allow banking agencies and the Securities and Exchange Commission to bar compensation practices that push financial companies to take "inappropriate risks." The House and Senate must pass the bill before the president could sign it into law. The House may vote as early as Friday.

"There is a risk to the system when the incentive structure is huge," said Rep. Barney Frank (D-Mass.), the committee chairman.

Lawmakers have faulted Wall Street banks for basing employee compensation on revenue generated in a given year without adequate regard to whether those transactions succeed over time. The legislation, which goes further than the Obama administration's proposals to regulate compensation, also is aimed at quelling a political uproar over bonuses paid to executives whose companies took aid from government rescue programs.

Republicans opposed the measure, arguing that giving regulators power to ban compensation practices would be tantamount to the government determining pay. No Republicans voted for the bill.

"The government should not be in a position of setting executive compensation," said Rep. Spencer Bachus (R-Ala.).

The measure would give shareholders an annual vote on salary and bonuses for top executives at all U.S. public companies. The votes are non-binding, meaning companies can ignore them.

The committee approved an amendment from Frank that authorizes the SEC to exempt some companies from the shareholder votes. He said the amendment gives the SEC flexibility to weigh the effect of "say-on-pay" on small companies.

The measure also requires that members of a corporate board's compensation committee be independent, meaning they can't be executives or employees of the company.

The legislation drew an immediate rebuke from the U.S. Chamber of Commerce, the nation's biggest business lobby, which said the measure would "restrict economic growth and job creation."

"This legislation would create a command-and-control regulatory scheme," said Tom Quaadman, an executive director of the group. "Employee compensation should be a decision made by appropriate levels of management or the board of directors and based on a variety of factors, including merit and promotion."

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