Last Friday, the House of Representatives passed the “Corporate and Financial Institution Compensation Fairness Act of 2009.” We summarized the bill as originally introduced by Representative Barney Frank in our previous memorandum entitled “Recent Executive Compensation Legislative Proposals.”The core of the bill as passed by the House remains largely the same. In addition to certain technical modifications, however, the revised bill introduces a few important changes. Below is a brief summary of each of the bill’s key provisions and the significant changes from the prior form.
Advisory Say on Pay
The bill would require all public companies to hold an advisory “say on pay” vote annually with respect to executive compensation generally. In addition, the bill would require an advisory vote to approve any “golden parachutes” paid in connection with certain mergers and acquisitions transactions, if not previously approved in the annual vote, where shareholders are asked to approve such transactions.
- The golden parachute provisions would apply to all named executive officers. The bill as introduced had applied only to “principal” executive officers.
- The SEC would have the authority to exempt certain issuers from the “say on pay” rules. The SEC would be directed to take into account, among other considerations, the potential impact of the rules on smaller reporting issuers.
- Institutional investment managers would be required to disclose their “say on pay” voting record at least annually.
- “Say on pay” votes would remain advisory, without the effect of precluding future clawbacks. The Financial Services Committee markup of the bill had contained a provision that would have prohibited clawbacks on compensation that had been approved in an advisory vote, subject to certain exceptions. Importantly, this provision was struck from the final bill.
Compensation Committee Independence
The bill would require compensation committee members and any advisors they hire to meet certain independence standards.
- Although companies would still need to disclose whether their compensation committees had hired an independent compensation consultant, they would no longer need to explain why they had not.
“Perverse Incentives” in Financial Institution Compensation
The bill would require certain “covered financial institutions” to disclose to Federal regulators the structure of their incentive-based compensation arrangements. Regulators could prohibit certain arrangements that are considered a threat to the institution or the financial system more broadly.
- A rule of construction would clarify that the bill should not be construed as requiring the reporting of the actual compensation of particular individuals.
- There would be an exemption for covered financial institutions with assets of less than $1 billion.
- There would be a limited grandfathering rule that would protect from government recovery any incentive compensation paid under an arrangement that is in place on the date of enactment and does not extend for more than 24 months.
- The Government Accountability Office would be required to carry out a study to determine whether there is a correlation between compensation structures and excessive risk taking.
The Senate is expected to turn to this legislation after Congress’s August recess.