Having a Say on Executive Pay

Many shareholders would love to get a chance to vote on whether the CEO of a company whose stock price is going down the tubes deserves a raise next year.

They may just get that with the new “say-on-pay” legislation that the Obama administration proposed to Congress last week. The bill would require all publicly traded companies to give shareholders a non-binding vote on executive compensation packages. The president has had an interest in such legislation for a long time, and he co-sponsored a bill in 2007, back when he was just a freshman senator.

Pay packages for senior executives would be subject to a vote and would include tables summarizing salary, bonuses, stock and option awards, as well as golden parachute and pension compensation. There would also be a separate vote on golden parachutes in case a merger or acquisition occurs, and there would have to be a clear disclosure, before a shareholder vote on the transaction occurs, of the exact amounts that senior executive officers would receive if the deal were approved.

The proposed legislation is similar to regulations that were adopted in the U.K. in 2002 and seemed to lead to a tighter alignment between pay and performance than what we oftentimes see in this country. Australia, Sweden, Norway, and the Netherlands have followed suit, and maybe now the U.S. will as well. Best of all, the proposals could discourage senior executives from taking their companies in disastrous directions for the sake of making their stock options pay better the next quarter.

“The entire economic community, as well as ordinary workers and citizens, have a strong interest in ensuring that we do not return to the practices that encourage short-term gains be emphasized at the expense of long-term value creation and sound risk management,” said Gene Sperling, a counselor to Treasury Secretary Timothy Geithner, in a briefing with reporters last week.

Compensation committees would need to become more independent if the legislation is approved, and they would be able to hire independent consultants, such as CPAs, to advise them on the appropriate pay for senior management. The compensation comiteee itself would have to meet exacting standards for independence from management and not receive additional compensation for fulfilling that role. Any counsel they received would need to be independent from management and consultants hired by management. The compensation committees would have the authority to hire independent compensation consultants as well as outside advisors to ensure they were setting compensation that served the long-term interests of shareholders.

The legislation, if it survives Congress in anything close to its original form, could provide a way to keep corporate boards from rubberstamping whatever outlandish pay packages the CEO demands and make senior execs more accountable to shareholders. And it could provide a new niche for accounting firms who can provide independent advice to compensation committees on how much the CEO really deserves.