On June 10 the U.S. Treasury announced some principles about executive compensation in the financial sector, and it landed squarely in the middle of the divide.
The new golden rules of compensation are as follows: “First, compensation plans should properly measure and reward performance; second, compensation should be structured to account for the time horizon of risks; third, compensation practices should be aligned with sound risk management; fourth, we should reexamine whether golden parachutes and supplemental retirement packages align the interests of executives and shareholder; finally, we should promote transparency and accountability in the process of setting compensation.”
To that end, the Obama Administration has asked Congress to enact “say-on-pay” legislation that would mandate the right of investors to cast non-binding, say-on-pay votes by shareholders of all public companies. The votes would cover compensation for the top five executives and golden parachutes. The White House is also calling for legislation that would require compensation committees to “meet independence requirements similar to audit committee members under Sarbanes-Oxley;” give committees authority over compensation consultants; allow committees to hire legal and other advisors; and force companies to “provide appropriate funding, as determined by the compensation committee,” to pay for all the outside help it needs.
Meanwhile, Treasury addressed the nitty-gritty of executive comp restrictions under TARP, filing an interim final rule that would limit bonuses, restrict the payment of golden parachutes, and “imposes a clawback for any bonus base on materially inaccurate performance criteria,” according to a Treasury fact sheet. In addition, the rule would create a special master to review compensation for senior officers and other highly paid employees “at firms receiving exceptional assistance,” including payments made prior to February 17, 2009.
Mark Poerio, co-chair of the executive compensation and employee benefits group at law firm Paul Hastings, believes that the Treasury’s overall approach to executive comp is “in line with best practices” being considered by the financial sector. But the move on TARP-related comp issues was a surprise, says Poerio: “The thinking was that Treasury would chip away at the Dodd provisions. But regulations not only implement those provisions but expand on them.” The proposed rule prohibits tax gross-ups, for example. Poerio calls Treasury’s stance “very activist. This goes beyond disclosure, and into compensation policy.”