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June 11, 2009
Obama Administration Proposes Legislation on Say-on-Pay
    by Robert Kropp

Legislation would authorize the SEC to require annual shareowner votes on executive compensation, and would require standards of independence for corporate compensation committees.

In a decisive show of support for the concerns of activist shareowners and the public over the effects of excessive executive compensation at corporations, the Obama administration has proposed two significant pieces of legislation addressing the issue.

The first proposed legislation, according to a statement issued by Treasury Secretary Timothy Geithner, will give "the SEC authority to require companies to give shareholders a non-binding vote on executive compensation packages." The second will give "the SEC the power to ensure that compensation committees are more independent, adhering to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act."

A fact sheet issued by the Treasury Department, entitled Ensuring Investors Have a "Say on Pay", proposes to authorize the Securities and Exchange Commission (SEC) to require non-binding votes on executive compensation for all public companies. Under the proposed legislation, all public companies will be required to include in their annual proxy statements a shareowner proposal on executive compensation.

Shareowners will gain the right to vote on all forms of annual compensation for the top five executives of all public companies. Additionally, shareowners will gain the right to vote on golden parachute compensation disclosed in annual proxy statements.

The second proposed legislation will require that corporate compensation committees have the same degree of independence as do audit committees under the Sarbanes-Oxley Act of 2002, which introduced specific mandates and requirements for corporate financial reporting.

A second fact sheet issued by Treasury, entitled Providing Compensation Committees with New Independence, describes the proposed rules to give compensation committees "the authority and tools they need to be truly independent."

Compensation committees will have direct authority over any compensation consultants they retain, will have the authority to retain legal counsel and other advisers, and will be funded appropriately in order to adequately compensate consultants, legal counsel, and other advisors.

Furthermore, the proposed legislation will direct the SEC to establish standards for ensuring the independence of compensation consultants and legal counsel used by the compensation committee.

In the statement issued by Secretary Geithner, he said, "Many leaders in the financial sector have acknowledged the problems posed by past compensation schemes, and have already begun implementing reforms. But we have more to do to address this challenge, and we look forward to continuing this conversation with a wide range of stakeholders in the weeks and months ahead."


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