In April I wrote about how the current environment is renewing an interest in shareholder votes on executive compensation. The Obama administration has made it clear that “say on pay” is an integral part of efforts to reform corporate governance. On June 10th of this year, the Administration released a “Say on Pay” Fact Sheet outlining President Obama’s perspective on the need for non-binding shareholder votes on executive compensation and golden parachute payments.

The Treasury has already proposed legislation, the Investor Protection Act of 2009 that I wrote about in July, which would require a non-binding shareholder vote on executive compensation, golden parachute payments, and improve compensation committee independence.

The Bill

On July 31, 2009, the House of Representatives approved the “Corporate and Financial Institution Compensation Fairness Act of 2009” (H.R. 3269). The stipulations in this bill closely mirror the Treasury’s proposed Investor Protection Act of 2009.

Say on Pay

If enacted, this bill will impose the following Say-on-Pay standards:

• Annual non-binding shareholder approval of executive compensation
• Disclosure (in simple tabular format) of compensation to principal executives relating to corporate transactions as well as the aggregate total for such compensation
• Separate non-binding shareholder approval of disclosed compensation to principal executives related to corporate transactions

Compensation Committee Independence

In addition, it includes the following requirements to facilitate compensation committee independence:

• In order to be considered independent, members of the compensation committee may not receive any compensatory fees from the company and cannot be affiliated with the company in any other way.
• Companies must allow compensation committees to engage independent compensation consultants and legal counsel as well as provide funding to do so.
• In their proxies, companies must disclose whether or not their compensation committees engaged the services of a compensation consultant and if not, then provide an explanation.

Further Restrictions for Financial Institutions

Additionally, the House bill would give regulators the authority to prohibit any compensation arrangement that encourages “inappropriate risks” by financial institutions which could have “serious adverse effects on economic conditions or financial stability”. Since the bill only instructs Federal regulators to come up with appropriate legislation to prohibit this type of compensation, it is not yet clear how it will be defined or what penalties may be imposed. It does reinforce that the Administration clearly feels that the compensation structures within financial institutions were at least partially to blame for the economic crisis. Although this is a small part of the bill, I think it’s worth keeping an eye on. If financial institutions are ultimately subject to this type of scrutiny, then all public companies should take note and consider keeping their own compensation policies within the guidelines set for financial institutions and banks.

The next stop for this legislation is the Senate, which is expected to tackle say on pay and compensation committee independence this fall (see the LA Times article, “‘Say on Pay’ bill passes in largely party-line House vote”.

The Volatile Market – What Can You Do?

The economic conditions that have lead to recent legislation have been impacting stock plans for a while already. To find out the best practices for responding to them, don’t miss our Conference session “What To Do When the Well Runs Dry: Grant Guidelines in a Volatile Market”. See you in San Francisco!

-Rachel