Geithner: 'Say on Pay,' No Caps

White House proposals on executive compensation include support for shareholder control and compensation committee independence

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The White House proposal for overhauling executive-pay practices, announced on June 10, was as notable for what the Administration isn't advocating as for what it is.

Treasury Secretary Timothy Geithner said the Administration would support legislation known as say on pay, which would give shareholders a nonbinding vote on executive pay packages. Geithner also threw his support behind separate legislation aimed at making compensation committees more independent from management. It was the first time the Administration has said openly it would support so-called "say on pay" legislation, though it has earlier signaled its interest in seeing it passed. But Geithner added that the Administration won't mandate compensation limits.

"We are not capping pay," Geithner said after a meeting with Securities & Exchange Commission Chairwoman Mary Schapiro, Federal Reserve Governor Dan Tarullo, and top compensation experts. "We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive. Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives."

The combined moves sent a sigh of relief across the corporate sector, where many had feared the Administration was planning more stringent controls on compensation. "What they have proposed is fairly modest; we were expecting something much more heavy-handed," says Michael S. Melbinger, the head of the executive compensation practice at Winston & Strawn in Chicago. "They're basically ideas that have been kicking around awhile; they're not that far from what already constitutes best practices."

Shareholder Interests

In his remarks, Geithner said the Administration is putting its support behind pending say-on-pay legislation, which would give the SEC the ability to mandate nonbinding shareholder votes on executive compensation packages. The rules would apply to all public companies, according to a fact sheet distributed by the Treasury Dept.

"Say on pay—which has already become the norm for several of our major trading partners, and which President Obama supported while in the Senate—would encourage boards to ensure that compensation packages are closely aligned with the interest of shareholders," Geithner said.

The Administration had been widely expected to push for an expanded say on pay measure for months. Obama is a co-sponsor of the say on pay bill now before the Senate, and he frequently cited the need for it on the campaign trail. And when the White House announced its initial pay restrictions on the financial sector in February, it had already made say on pay the de facto standard for the ailing financial services firms that had turned to Uncle Sam for help. The only way any of the firms which had been bailed out by the Treasury's Troubled Asset Relief Program (TARP) could get around the stiff pay limits imposed by the Obama Administration and Congress was by submitting their compensation plans to a shareholder vote. "There is no one in the country who didn't expect this to be the law of the land by year's end," says Melbinger.

Still, the President's overt backing will likely speed things up. "There's already a broad consensus on Capitol Hill behind say on pay; this virtually guarantees swift passage," says Patrick McGurn, special counsel to proxy advisor ISS Governance Services. While he had expected a bill to move by late in the year, McGurn now thinks it could be signed into law before the August recess. That means say on pay could be in effect by the time 2010 proxy season rolls around next spring.