Allowing Shareholders to Vote on Executive Pay

April 18, 2007
Blog
Today the House will consider the Shareholder Vote on Executive Compensation Act, which was introduced by Financial Services Chairman Barney Frank in March. Yesterday the Financial Services Committee issued the following release on the bill, and we will have further coverage this afternoon:

HOUSE OF REPRESENTATIVES TO CONSIDER ALLOWING SHAREHOLDERS TO VOTE ON EXECUTIVE PAY

Washington, DC--The U.S. House of Representatives will meet this week to consider and vote on H.R. 1257, the Shareholder Vote on Executive Compensation Act. Also referred to as the "say on pay" bill, it would require that public companies ensure that shareholders have an annual nonbinding advisory vote on their company's executive compensation plans; and an additional nonbinding advisory vote if the company awards a new golden parachute package while simultaneously negotiating the purchase or sale of the company. H.R. 1257 has the support of many shareholder and workers rights groups, and investors, including the California State Teachers' Retirement System and the International Corporate Governance Network. Introduced in March by House Financial Services Committee Chairman Barney Frank, the Shareholder Vote on Executive Compensation Act was acted on the in the Financial Services Committee on March 22, 2007 and passed by a vote of 37-29.

Debate on H.R. 1257 will begin on Wednesday, April 18 in the afternoon, and will continue on Friday, April 20 in the morning for final vote.

Building off the new Securities and Exchange Commission (SEC) disclosures, H.R. 1257, "The Shareholder Vote on Executive Compensation Act" would require that public companies ensure that shareholders have:

  • An annual nonbinding advisory vote on their company's executive compensation plans; and
  • An additional nonbinding advisory vote if the company awards a new golden parachute package while simultaneously negotiating the purchase or sale of the company.

This second vote is designed to help address a CEO's natural conflict of interest when negotiating the selling price of a company while simultaneously negotiating an additional personal exit package (e.g., as noted above, a CEO may be willing to sell the company for less if he/she personally receives more -- thereby reducing shareholder value). This provision would not apply to long disclosed "change in ownership" agreements -- and would only apply to new provisions added while negotiating the sale/purchase.

The nonbinding advisory vote will give shareholders a mechanism for supporting or opposing a company's executive compensation plan without micromanaging the company. Knowing that they will be subject to some collective shareholder action will help give boards more pause before approving a questionable compensation plan.

The nonbinding advisory vote approach has been used in the United Kingdom since 2003 and is now used in Australia as well. The policy change is credited with improving management/shareholder dialogue on executive compensation matters and increasing the use of long-term performance targets in incentive compensation. It was recently adopted voluntarily by Aflac, and according to Institutional Shareholder Services, is currently pending before 52 companies.

For more information about the bill and the problem of excessive executive compensation visit: http://financialservices.house.gov/ExecutiveCompensation.html

Full text of the Shareholder Vote on Executive Compensation Act >>

More information from our current legislation page >>