Out of Control Policy Blog

House Moving Towards Tighter Regulation of CEO Pay

One of the planks in President's financial services regulation reform proposal took a step forward yesterday. The House Financial Services Committee voted 40-28 to approve HR 3269, "The Corporate and Financial Institution Compensation Fairness Act," a bill that would "provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions." The bill still has to pass a full House and Senate vote.

The central part of the bill is "Say on Pay" language, aimed at increasing accountability at the executive level. All top executives at firms worth over $1 billion would have to submit their compensation package to shareholders for a vote every year. Technically, there isn't that big of a problem with requiring non-binding votes from shareholders, but it opens the door to other types of regulation and the potential for explicit control on pay. For instance, HR 3269 goes further than just Say on Pay:

  • The bill requires that committees who set compensation with in a firm be composed of outside directors, and not include those executives whose pay is set by that committee (a common practice on Wall St.). This is essentially reaching into a private company and telling them how to structure their corporate governance. We don't tell baseball teams who to start at second base. We don't tell shipping companies who a freighter captain should be. The government can't say who is on the board of a private university or publishing company. This is an invasive reach for the public sector into the operating practices of private firms.
  • The bill requires firms to disclose their incentive pay structures and gives regulators the power to cancel the contract if it poses a systemic risk. This would essentially give the Fed or whoever winds up with systemic risk oversight the power to approve compensation contracts. They could also direct the development of salary negotiations though implicit control.

It would also seem that public disclosure of how much top executives are paid hurts competition over top talent by making it easier for outside firms to poach executives with lucrative offers. But, shareholders do have a right to know how much the director of the company they are part owner in gets paid, and with millions of shareholders, word is going to leak out somewhere.

There is one more aspect of concern with Say on Pay. It is, again, understandable that shareholders would want to have a vote. But an annual government mandate ignores a few things. First, it costs money to holder this kind of a vote, mailing out information to everyone, fielding questions, collecting ballots, managing the process. And second, many compensation packages are structured on multi-year deliverables and wouldn't be up for reconsideration but every five or so years.

These are a couple reasons why shareholder votes are not common practice. However, the biggest reason is that shareholders always have a vote, with the sale of their stock. If a joint owner doesn't like the leader or the way he is paid, then that person can sell the stock and get out of the company. It is a tacit vote of confidence. And it should be significant enough.

A vote by the full House could come tomorrow.

Anthony Randazzo is Director of Economic Research


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