Executive Compensation
In
March of 2007, Congressman Barney
Frank, Chairman of the Financial Services Committee, introduced
H.R. 1257, "The Shareholder Vote on Executive Compensation Act."
The bill 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 is supported by many
shareholder and workers rights groups and investors, including
the California State Teachers' Retirement System and the
International Corporate Governance Network.
"The Shareholder Vote on Executive Compensation Act" was marked
up in committee on March 21-22, 2007 and it was voted favorably
out of the Financial Services Committee on March 28, 2007 by a
vote of 37-29.
Click here for documents related to the committee markup of this
bill and for vote records on amendments and passage of this
bill.
On April 20, 2007 the House of Representatives passed "The
Shareholder Vote on Executive Compensation Act" by a vote of
269-134.
Click here to see how Members of the House voted.
Click here to watch
clips of Chairman Barney Frank and Representative David Scott
debating H.R. 1257 on the House floor.
The Problem of Executive Compensation
According to the Corporate Library's 2006 CEO Pay Survey of
roughly 1400 CEOs (covering pay in FY 2005), the median CEO
received $13.51 million in total compensation, up 16 percent
over FY 2004. This came on the heels of a 30 percent increase
over FY 2003, 15 percent over FY 2002 and 9.5 percent over FY
2001.
The disparity between workers and executives has grown
significantly in recent years. According to Lucian Bebchuk, in
1991, the average large-company CEO received roughly 140 times
the pay of an average worker; in 2003, the ratio was up to 500
to 1.
The Cost of Executive Compensation
The amount of money involved reflects real costs to shareholders
and has real macroeconomic consequences. According to Bebchuk
and Grinstein's research, in 1993, the aggregate compensation
paid to the top five executives of U.S. public companies
represented 5% of company profits; by 2003 the ratio had more
than doubled to 10% and the total amount paid to these
executives during this period was roughly $350 billion. The size
and triggers in these packages also appear to be giving
executives incentives that undermine shareholder value and
market confidence, such as manipulating earnings or engaging in
unprofitable mergers and acquisitions.
Increasingly, research indicates that executive compensation
does not appear tied to company performance. Others have noted
that in many instances senior executives appear to be being
"paid for failure." As this Committee has seen first hand, even
executives of institutions that lose money, restate earnings,
and face extensive regulatory scrutiny have received (and
retained) substantial compensation packages.
The Recent SEC Compensation Disclosures
Last year, the Securities and Exchange Commission revised its
disclosure rules to require that public companies provide more
disclosure of executive compensation than had previously been
the case. After overwhelming response (over 20,000 comments),
the SEC's final rules will require that companies disclose to
shareholders, in plain English and significantly greater detail,
their executive compensation practices. In particular, it will
require greater disclosure of the company's compensation plans
for the CEO, CFO and highest paid executive officers and board
members.
Although the executive compensation rules have made substantial
progress on disclosure, it does not (1) provide any new tools
for owners to tailor/improve their company's compensation
approach; nor (2) change the fundamental relationship between
CEOs and Boards that gives rise to high CEO pay: in general,
management (CEOs) select the Boards that set CEO pay.
H.R. 1257, the Shareholder Vote on Executive Compensation
Act
Building off the new 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.
Click here for "The Facts on
H.R. 1257" prepared by staff of the Financial Services
Committee.
Click here for letters of support
for H.R. 1257, the "Shareholder Vote on Executive Compensation
Act."
Click here for
a Point/Counterpoint assessment of false claims about executive
compensation and H.R. 2157 prepared by the Institute for Policy
Studies and the Center for Corporate Policy.
Click here for bill text of H.R. 1257, the "Shareholder Vote on
Executive Compensation Act".
Click here for the April 20, 2007 press release on the House
passing the "Shareholder Vote on Executive Compensation Act."
Click here for the March 1, 2007 press release on the
introduction of H.R. 1257, the "Shareholder Vote on Executive
Compensation Act".
Click here for
Congressional Budget Office cost estimate for H.R. 1257.
Click here for documents of the March 21-22, 2007 Financial
Services Committee Markup of H.R. 1257 and for vote records on
amendments and passage of this bill.
Click here for documents of the March 8, 2007 Financial Services
Committee hearing "Empowering Shareholders on Executive
Compensation: H.R. 1257, The Shareholder Vote on Executive
Compensation Act".
Click here
for the report released on October 24, 2006 "Executive
Compensation vs. Workers- An Overview of Wages, Pensions and
Health Benefits of Rank-and-File Workers and Sky High Executive
Pay".
Click here
for an examination of the problems of executive
compensation released in November, 2005.
Click here for
archived information on Democratic efforts against executive
compensation abuse in the 109th Congress.