Treasury Unveils Executive Pay Proposals

Posted by: Theo Francis on July 16

Don’t say they didn’t warn you.

Barack Obama sponsored it when he was a senator. He campaigned on it, and voiced support for it after winning the presidency. Government officials said it was coming, more than once. And today, the Treasury released draft legislation for a “say on pay” measure, as well as legislation that would seek to make corporate compensation committees more independent.

Executive and corporate groups aren’t all that happy — they worry ordinary shareholders may get confused by lengthy pay disclosures and vote unwisely, or that pressure from activist shareholders will force boards to make bad pay decisions that hurt their companies in the long run.

But these days, they’re somewhat subdued in their objections.

Chalk it up to the sheer scope of the turmoil in the government-corporate relationship, says Tim Bartl, senior vice-president of the Center on Executive Compensation, founded and funded by human-resources executives (the folks who typically handle executive pay in a company). "There are some monumental changes in regulatory structure, and this is obviously being sandwiched in with some much larger changes," he says.

There's also fact that the companies and executives blocked less restrictive reforms for years, undermining their own say in the process now, says Paul Hodgson, a senior research associate at The Corporate Library, a corporate-governance and executive-pay advisory service.

"They may be kicking themselves because they had the opportunity to do it themselves in a way that might be more corporate-friendly than federal-friendly or shareholder-friendly, but they missed that opportunity," he says. Say on pay, in particular, has "become almost as much of a fait accompli as it can be without being passed," Hodgson adds.

The Administration's proposal joins several other say-on-pay measures kicking around Congress. Like most, it would require companies to put the compensation of top executives to a non-binding shareholder vote each year.

Administration officials argue such rules are going well in the UK and Scandinavia, and say the power comes not with "no" votes by shareholders, but because transparency and disclosure will force companies to better link compensation and long-term shareholder interests. (They cite various academic studies to support their position and, guess what, the other side does as well.)

The other measure the Treasury sent to Capitol Hill today tries to mirror post-Enron reforms to corporate audit committees. It establishes tougher rules for board compensation-committee members, and gives them the authority to hire independent consultants and legal advisers.

"You can legislate all you want for independence, but you can’t actually force someone to act independently," Hodgson says. "It’s probably a necessary empty gesture, but I don’t know that it’s going to make a lot of difference."

Both measures take on more significance once coupled with proposals from the Securities and Exchange Commission to give shareholders easier access to corporate proxies. "If they don’t feel say on pay is being listened to, they can say, 'OK -- we’ll get our own director on the board,'" Hodgson says. "That seems to me to be a more important and more effective way for shareholders to get [changes]."