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.