House Backs Greater Say On Pay by Shareholders

Rep. Barney Frank (D-Mass.), who authored the legislation, said that with it "the question of systemic risk will be in the hands of the government."
Rep. Barney Frank (D-Mass.), who authored the legislation, said that with it "the question of systemic risk will be in the hands of the government." (By Dennis Brack -- Bloomberg)
By David Cho and Tomoeh Murakami Tse
Washington Post Staff Writers
Saturday, August 1, 2009

The House approved legislation Friday that would give shareholders greater say over executive pay and expand the powers of regulators to limit compensation packages that they deem improper.

The measure, which passed 237 to 185, came in response to public outrage over massive bonuses paid out at big financial firms that took billions of dollars in emergency aid from the government.

"Under this bill, the question of compensation amounts will now be in the hands of shareholders and the question of systemic risk will be in the hands of the government," said Rep. Barney Frank (D-Mass.), who leads the House Financial Services Committee and who authored the bill.

The vote comes a day after New York Attorney General Andrew M. Cuomo reported that the nation's nine largest banks handed out $32.6 billion in bonuses last year even as they ran up more than $81 billion in losses and accepted tens of billions of dollars in emergency federal aid. Cuomo found that nearly 4,800 executives and other employees at these firms were each awarded at least $1 million.

But some compensation experts said they doubted the measure would reform the culture of extravagant pay that pervades Wall Street.

Rather than setting precise limits on what such firms can pay employees, the House bill adopts a more indirect approach, taking aim at the pay practices that encourage traders and executives to take big risks. Regulators could ban pay packages but would not be able to clamp down on compensation simply because it is considered lavish.

Pino Audia, a professor of organizational behavior at the Tuck School of Business, said the bill could have done more to limit companies' ability to change performance measures in order to maintain pay levels.

The bill also gives shareholders the right to reject a pay package, but their vote would be advisory.

Corporate compensation committees, meanwhile, would have to sever ties with management. Aspects of this provision have already been adopted by Wall Street firms. The independence of compensation committee members, for instance, is a requirement for companies to list their shares on the New York Stock Exchange.

The measure would not apply to financial institutions with assets of less than $1 billion.

"The bill does not look deliberately and consciously at the amount of compensation, only the incentives the pay structures produce," said Lucian Bebchuk, director of the program on Corporate Governance at Harvard Law School. "With respect to the shareholder 'say on pay' and bolstering on compensation committee independence, these are useful steps . . . but their effectiveness is going to be limited."

Still, some Republicans and some Democrats said the legislation goes too far because it would draw the government too deeply into the workings of private companies.

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