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August 01, 2009
US House Passes Bill that Limits Executive Compensation
    by Robert Kropp

In addition to requiring annual shareowner votes on executive compensation, the bill gives regulators the power to prohibit risky compensation packages at large financial institutions.


On July 31, the US House of Representatives passed, by a vote of 237 to 185, a bill introduced by Congressman Barney Frank of Massachusetts that would "amend the Securities Exchange Act of 1934 to provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions." Only two House Republicans voted in favor of the bill.

The Corp orate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) has four major components. The first requires an annual non-binding advisory vote by shareowners on executive compensation at public companies, as well as advisory votes by shareowners on compensation packages that include golden parachutes. The bill gives the Securities and Exchange Commission (SEC) the power to exempt categories of public companies from these requirements, with particular attention to be given to smaller public companies.

In addition, all institutional investment managers will be required to report annually on how they voted on any shareowner resolutions pertaining to executive compensation and golden parachutes.

The second component of H.R. 3269 requires that compensation committees be made up of independent directors, who do not "accept any consulting, advisory, or other compensatory fee from the issuer", except in their capacity as members of the committee. Furthermore, compensation consultants and other committee advisors must satisfy criteria of independence to be established by the SEC.

The third component of the bill applies to all financial institutions with more than $1 billion in assets. The institutions will be required to disclose to Federal regulators the structure of all incentive-based compensation packages, so that regulators may determine whether the structure "is aligned with sound risk management, (and) is structured to account for the time horizon of risks."

In addition, Federal regulators will prohibit any incentive-based payment arrangement that "could threaten the safety and soundness of covered financial institutions, or could have serious adverse effects on economic conditions or financial stability."

Finally, the bill requires that the Government Accountability Office (GAO) conduct a study analyzing the correlation between executive compensation structure and excessive risk-taking.

 

 
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