House Backs Greater Say On Pay by Shareholders
Bill Also Adds to Regulators' Power to Curb Compensation
By David Cho and Tomoeh Murakami Tse, 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
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
"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
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
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
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.
"The Democratic majority has a great desire to have the
government everywhere in our lives," Rep. Tom Price (R-Ga.)
said. "It cuts at the very core of our free market
Supporters argued that the bill would curb pay that motivated
banks to take bigger risks, even if these actions threatened the
stability of the entire financial system.
Treasury Secretary Timothy F. Geithner called the bill "a
positive step forward to increase accountability and
transparency in executive compensation, and to help ensure that
pay encourages long-term performance, not excessive
The measure is the first element of the Obama administration's
plan for overhauling the financial regulation to win adoption in
either house of Congress. Other proposals, such as setting
up a consumer financial protection agency, have slowed as
opposition from industry lobbyists has intensified.
The executive compensation bill, which was approved largely
along party lines with the Democratic majority prevailing, faces
a more difficult road in the Senate. Some Senate Democrats
want to combine President Obama's reform proposals into a single
bill, which may delay action specifically on executive pay.
Democrats say the Senate is not expected to take up executive
pay legislation until after the summer recess, which ends after
Labor Day weekend.
Reaction to the House vote on Wall Street was largely muted.
Although some lobbyists took issue with the provision that
empowers federal regulators to bar some pay practices, many
industry officials said they were more concerned about other
parts of the administration's plan for overhauling regulation.
The executive compensation bill itself is "small" and not a
cause for great concern, one banking official said. "It's
not something we are fighting very hard on," said the official,
who spoke on condition of anonymity because of the sensitivity
of the issue.
Not every industry official was pleased with the House vote.
"We are deeply disappointed in the outcome of the House vote
today," said John J. Castellani, president of Business
Roundtable. "Once again, the search for a
one-size-fits-all solution to executive compensation has taken
us down the wrong path, potentially at the expense of long-term
economic growth and job creation."