New legislation may change exec pay
A bill that passed the House would allow shareholders to vote on pay packages for Wall Street executives, and give regulators new powers to limit rewards for risk taking. Amy Scott reports.
New York State Attorney General Andrew Cuomo answers a question from the media. (Chris Hondros/Getty Images)
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KAI RYSSDAL: Say this for the House of Representatives. They are not ducking out early to get started on their summer vacations. A bill the House passed today would change the way big banks can pay their executives. Shareholders get a nonbinding vote. There's a new risk-reward curb too. The vote comes after a report from New York Attorney General Andrew Cuomo. He says some banks that got bailout money paid bonuses last year that were more than their total profits. Think about that for a second.
From New York, Marketplace's Amy Scott has more now on what the bill could mean for Wall Street.
Amy Scott: One of the more controversial parts of this bill involves curbs on risk-taking. Regulators will be able to ban incentives that encourage too much risk. And not just for banks that accepted government aid, but any financial institution with more than a billion dollars in assets.
Lucian Bebchuk teaches law at Harvard.
Lucian Bebchuk: That's an element that could potentially be quite consequential, depending on whether regulators indeed make substantial use of the power.
Bebchuk says regulators could force banks to tie bonuses to long-term performance rather than short-term profits.
Eric Moskowitz is a compensation consultant at Options Group. He favors some sort of claw-back provision, meaning the firm could take back some of a trader's income if a risky bet didn't pay off.
Eric Moskowitz: If the people are under the understanding that there's some sort of long-term effect on the individual, who's putting on these positions, then I think they will think about it more on a larger scale, versus looking at it as a way to make this year's bonus bigger.
In addition to the shareholder vote on pay, the bill requires independent compensation committees on boards. Committee members would have to be free of financial ties to the company or its executives.
Compensation specialist Graef Crystal doubts the say-on-pay measure will be effective. He says boards have been ignoring shareholders for years, why stop now? And he says regulators will be up against some very smart lawyers and compensation consultants.
Graef Crystal: It'll be Lions five, Christians zero. It happens every time. People will game the system, they'll come up with a way to get around it.
The Senate is expected to take up the issue in September, after the summer break.
In New York, I'm Amy Scott for Marketplace.
Comments
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From Cincinnati, OH, 08/03/2009
This is another case of politicians trying to look like they are on top of the situation and are doing something. Shareholders have been ignored in the past. What makes this legislation useful? I do not agree with regulating compensation. On the other hand the many executives in club have been ripping off the shareholders. The pay comes out of returns shareholders do not get. Find good companies with good business practices and vote with your feet. If very few want the stock they will take notice. Given the recent losses the shareholder did not do well anyway. We need to revamp executive compensation that is really tied to real business, not Wall Street performance.
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