The proposal would allow the SEC to issue rules requiring companies to give shareholders more say in executive compensation.
Treasury Secretary Timothy Geithner has called for legislation to give the Securities and Exchange Commission authority to issue say-on-pay regulations.
President Obama has consistently supported such legislation when he was in the Senate, said Gene Sperling, a counselor to Mr. Geithner, in a telephone press briefing yesterday
“This has been in place in the U.K.” since 2003, “and has been shown, I think, to have a very strong and powerful impact on increasing transparency and accountability,” he said.
The proposal would allow the SEC to issue rules requiring companies to give shareholders more say in executive compensation.
In addition, the administration put forward another legislative proposal to ensure that compensation committees are independent, with the authority to engage legal counsel and funding.
“This proposal would do for compensation committees what was done for audit committees following the Enron debacle,” Mr. Sperling said.
The Sarbanes-Oxley Act gave corporate audit committees new powers to oversee corporate governance.
“These two legislative proposals together are a strong movement towards transparency, independence and accountability in the setting of compensation,” he said.
Those proposals apply to all public companies, regardless of whether they have received assistance from the federal government.
At the same time, the Treasury Department also announced an interim final rule on governance and compensation for companies in the Troubled Asset Relief Program.
The regulation implements requirements of American Recovery and Reinvestment Act, enacted in February.
Under the legislation, bonus payments to senior executive officers and highly compensated employees be limited. For companies receiving significant amounts of public aid, the top-five senior executive officers and the next 20 most highly paid employees bonuses can not be greater than a third of their total compensation.
Traditional commission-type compensations are exempt from the restrictions, but the new regulations make it clear that companies can not make changes from traditional salary plans in order to take advantage of the commission exemptions, Mr. Sperling said.
The regulation also prohibits golden parachutes to senior executive officers and the next five most highly-paid employees, and it imposes clawbacks on bonuses based on inaccurate performance.
The administration went beyond the requirements of the Recovery Act by appointing a special master, Kenneth Feinberg — who headed the government’s Sept. 11 Victim Compensation Fund after the terrorist attacks in 2001 — to approve or disapprove the structure compensation plans for the top 100 employees at seven companies that have receive the most aid, including American International Group Inc. of New York.
That gives him the authority to review whether compensation meets standards of sound risk management, Mr. Sperling said.
Companies that limit salaries to $500,000, with additional compensation paid in some form of long-term restricted stock, would be exempted from having their pay plans disapproved, Mr. Sperling said.
Compensation must reflect performance, and compensation given as equity should be held for a period of time to prevent executives from walking away with big payments based on short-term performance, he said.
The rules are designed to help TARP recipients can repay their obligations, he said.
Sue Asci
The administration’s plans drew fire and plaudits from advocacy groups.
“The center believes that improvements in disclosure that clarify the link between pay and performance would be the best way to improve pay practices in the U.S. rather than mandating annual pay votes,” Timothy Bartl, senior vice president and general counsel of the Washington-based Center on Executive Compensation, said in a statement released yesterday.
The organization represents senior human resources executives at 250 of the nation’s largest corporations.
Not surprisingly, say-on-pay advocates were pleased.
“It was a very encouraging step towards making the advisory vote a reality,” said Tim Smith, senior vice president at Walden Asset Management, a division of Boston Trust and Investment Management Co. He is also the organizer of a national coalition of investors advocating for say on pay.
Still, Mr. Smith said, the administration’s proposal does not include compensation restrictions for companies that have not received federal bailout money.
“Numerous issues around compensation are still left to be addressed,” he said. “Investors and others still need to press companies to eliminate abuses and to ensure that the pay package is adequately linked to performance.”
The proposal comes on the heels of the spring proxy season, in which approximately 100 shareholder resolutions were filed seeking an advisory say-on-pay vote on executive compensation, according to Mr. Smith.
To date, most of the shareholder meetings have taken place, and “the average vote in favor of the proposal has been 47%,” he said.
