Geithner: 'Say on Pay,' No Caps

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What impact might that have? Governance activists say it won't bring pay levels down instantly—indeed, it may not bring them down at all. But over time, it should help make boards more responsive to shareholder concerns, which could lead to pay packages in which pay is more closely tied to company performance. That's what's happened in the UK since say on pay was adopted. "Boards are embarrassed to be told by the shareholders they are supposed to be serving that the package they've agreed to isn't adequate," says Jesse M. Fried, a law professor at the University of California at Berkeley and co-author of Pay Without Performance: The Unfulfilled Promise of Executive Compensation. "The vote may be non-binding, but the prospect of having pay arrangements voted down will cause boards to consult with large institutional investors before the finalizing a deal." He also argues that the adoption of say on pay in the UK has opened the door to more communication between boards and shareholders in general, leading to improved corporate governance overall.

In addition, Geithner said the Administration will introduce legislation that would give the SEC power to make sure that corporate compensation committees adhere to independence standards "similar to those in place for audit committees as part of the Sarbanes-Oxley Act."

The committees would also have more direct authority over independent compensation consultants and outside counsel. The rules would apply to all companies listed on national securities exchanges, according to Gene Sperling, a top Geithner aide. Treasury's goal: "To ensure that compensation committees are not just independent in name, but in fact," Sperling said in a media conference call, adding that it was critical for compensation committees to have "the rules and the tools they need to be independent."

Governance experts say those changes will help, but mostly on the margin. "There's definitely a need for tightening of standards, but it's not a glaring problem," says McGurn. On their own, the improved board standards would not likely bring much of a change if say on pay were somehow to stall in Congress. "Unless the balance of power is shifted between shareholders and the board, we won't see any lasting impact on pay practices," warns Fried. "You might see some minor improvements for a while, but when the heat dies down, boards would eventually lapse back into bad habits."

Fully Understanding Pay Packages

While backing away from some of the more stringent controls on pay that some in Congress and elsewhere have advocated, pay experts say the Administration's proposed changes may be more likely to have an effect. Efforts to impose strict controls on pay in the past have been largely ineffective and often led to unintended consequences, argues James F. Reda, head of independent pay consultant James F. Reda & Associates. "You can't legislate this kind of thing; it just creates more work for clever lawyers," he says. Instead, he argues, the only effective way to bring pay under control is to do what the Administration appears to be doing: "You've got to make the compensation committee as independent as possible," says Reda. "And make sure there is disclosure; you've got to make sure the compensation committee truly understands" what a contract entails. That may sound obvious, but until the SEC imposed heightened pay disclosure requirements in 2005, many directors didn't understand how the various elements of a CEO's pay package added up—one reason why they were as surprised as shareholders when departing CEOs often left with stunningly high packages.

Meanwhile, the Administration is preparing to announce pay practices for top executives at financial firms that received money from the $700 billion Troubled Asset Relief Program. A provision of the $787 billion stimulus package passed earlier this year put limits on the pay and bonuses of the 20 top-earning executives at companies receiving federal bailout money.

Mintz is news editor for BusinessWeek.com in New York. Sasseen is Washington bureau chief for BusinessWeek.