http://www.latimes.com/business/la-fi-execpay1-2009aug01,0,5217512.story
From the Los Angeles Times
COMPENSATION
'Say on Pay' bill passes in largely party-line House vote
The measure is a response to public anger over bonuses
paid by companies that took billions in bailouts.
By Walter Hamilton and
Richard Simon
August 1, 2009
Reporting From New York and
Washington -- Responding to the public furor over bonuses paid to Wall Street
executives, the House of Representatives has voted to give regulators the
authority to ban compensation practices that encourage banks to take excessive
risks.
The passage of the measure, which represents the first piece of
President Obama's overhaul of financial regulations, comes a day after the
release of a report showing that nine big banks paid out a combined $32.6
billion in bonuses despite taking $175 billion in taxpayer aid to survive the
financial crisis.
"If the last year has taught us anything, it's that the
compensation practices of some of our largest corporations have gotten
completely out of control," said Rep. Jim McGovern (D-Mass.).
Friday's
largely party-line vote sent the Corporate and Financial Institution
Compensation Fairness Act to the Senate, which is expected to take up executive
pay this fall as part of broader financial regulatory legislation.
The
237-185 decision came as lawmakers head home for their summer recess, eager to
show voters they responded to the outrage over multimillion-dollar bonuses paid
out to employees of bailed-out companies such as banking giant Citigroup Inc.
and insurer American International Group Inc.
The bill would give
shareholders of public companies annual, nonbinding advisory votes on executive
pay and so-called golden-parachute severance packages. It also would require
that compensation committee members satisfy guidelines ensuring their
independence from the managers whose pay they set.
A central element of
the bill would allow regulators to prohibit so-called incentive compensation
that encourages lenders or traders to take heavy risks that threaten the health
of the bank or the financial system.
Critics say the banking meltdown was
caused partly by dangerous practices such as the creation of bonds tied to
subprime mortgages that minted huge paychecks but carried no accountability for
the havoc they eventually wrought on the financial system.
"What this
bill explicitly aims at is this practice where people are given bonuses if the
gamble pays off, but don't lose anything if it doesn't," said Rep. Barney Frank
(D-Mass.), chairman of the House Financial Services Committee and the bill's
chief author.
Yet, as with some other provisions of the bill, some
experts questioned how much practical benefit it would have. It's unclear how
regulators would assess risky practices and whether they would be able to
circumscribe pay without micromanaging the banks or intruding upon the
traditional workings of the financial system.
By its nature, Wall Street
is in the business of risk-taking, and financially innovative products,
especially when first developed, can be chancy, said executive-pay expert Brian
Foley.
Rather than limiting bonuses, the key to avoiding drastic losses
is to ensure that financial institutions understand the magnitude of risks
across their various business lines and investment holdings, and manage those
risks accordingly, he said.
"The problem isn't with the risk itself,"
Foley said. "It's with managing the risks and hedging the risks. In the end, pay
doesn't impact risk anywhere near as much as critics think it
does."
Legislators left the details of the provision intentionally broad
to give regulators the latitude to interpret and implement the rule as needed,
said Steve Adamske, a spokesman for the House Financial Services
Committee.
The "Say on Pay" measure requiring annual shareholder votes on
executive pay packages also has been criticized as potentially ineffective.
Those votes would take place months after compensation is paid out and wouldn't
force companies to reduce payouts if investors object. And thus far,
shareholders have shown little inclination to reverse pay despite the public
furor.
At the roughly two dozen U.S. companies that have voluntarily
implemented say-on-pay in the last two years, shareholders have never voted down
a pay package.
The House bill has been met with stiff resistance from
Wall Street.
"It represents the government taking a large step into the
day-to-day operations of corporate America," said Scott Talbott, chief lobbyist
for the Financial Services Roundtable, an industry trade group that opposes the
bill. "This is the beginning of a fundamental shift away from free enterprise
and toward government regulation."
Banks already have taken steps to
eliminate dangerous compensation practices, Talbott said.
One
now-banished practice, he said, is paying bonuses to salespeople who sign home
buyers to mortgage loans charging higher interest rates than they could
otherwise qualify for.
Aside from the ethical implications, the practice
led some home buyers to default on loans whose payments they couldn't
afford.
"Companies that made bad decisions and took excessive risks are
no longer in business," Talbott said. "The other companies recognize those
mistakes and have adjusted their own pay practices to guarantee their own
long-term health."
Democrats hailed the measure while Republicans railed
against it.
"We've got to act to prevent the next financial meltdown,"
said supporter Rep. Brad Sherman (D-Sherman Oaks).
Republicans returning
to their districts appear certain to portray the legislation -- coming as
Democrats work to overhaul healthcare -- as the latest effort by the
Democratic-controlled Congress and White House to expand the reach of
government.
Rep. Pete Sessions (R-Texas), in a comment echoed by fellow
Republicans, assailed the measure as "unprecedented government intervention in
the free enterprise system."
Rep. Jeb Hensarling (R-Texas) said
sarcastically, "Why doesn't this do anything about Hollywood stars who make $25
million for a movie, yet the movie loses money?"
A report on Wall Street
pay released Thursday by New York Atty. Gen. Andrew Cuomo's office renewed the
controversy over bonuses handed out to bankers whose companies took billions in
government bailouts.
Nearly 5,000 people received bonuses of $1 million
or more, according to the report, including 738 employees at Citigroup Inc.,
which got $45 billion from the government.
walter.hamilton@latimes.comrichard.simon@latimes.com