H.R. 3269: Corporate and Financial Institution Compensation Fairness Act

H.R. 3269

Corporate and Financial Institution Compensation Fairness Act

Date
July 31, 2009 (111th Congress, 1st Session)

Staff Contact
Communications

Floor Situation

H.R. 3269 is expected to be considered under a structured rule, making the two amendments described below in order. The legislation was introduced by Rep. Barney Frank (D-MA) on July 21, 2009. The bill was ordered to be reported, as amended, by the Committee on Financial Services by a vote of 40-28 on July 28, 2009. The rule provides one hour of debate equally divided, controlled by the chair and ranking minority member of the Committee on Financial Services.

Bill Summary

H.R. 3269 amends the Securities Exchange Act of 1934 to require a separate shareholder vote to approve executive compensation as disclosed pursuant to rules of the Securities and Exchange Commission (SEC).

Say on Pay:  H.R. 3269 would require all publicly traded companies to hold an annual, non-binding shareholder vote on compensation for executives.  Additionally, it would mandate a separate non-binding shareholder vote on golden parachute compensation in the event of a corporate merger or acquisition.

The bill also prohibits clawbacks on compensation once approved by a majority of shareholders.

Compensation Committee Independence:  H.R. 3269 would require that all publicly traded companies have compensation committees comprised of independent directors.  Compensation consultants to the compensation committee would also be required to meet independence standards established by the Securities and Exchange Committee.

The bill directs the SEC to study and report to Congress within two years about the use of compensation consultants meeting the SEC established standards for independence.

Federal Regulatory Determined Compensation Restrictions for Financial:  H.R. 3269 requires such regulators to prescribe joint regulations that prohibit any compensation structure or incentive-based payment arrangement that encourages inappropriate risks by financial institutions (with more than $1 billion in assets) or their officers or employees that could: (1) threaten the safety and soundness of covered financial institutions; or (2) present serious adverse effects on economic conditions or financial stability.  This provision exempts financial institutions with assets less than $1 billion.

The bill directs the Comptroller General of the United States to carry out a study to determine the whether there is a correlation between compensation structures and excessive risk taking. 

 

Background

Most executive pay packages contain four basic components: a base salary, an annual bonus tied to accounting performance, stock options, and long-term incentive plans. In addition, executives participate in broad-based employee benefit plans and also receive special benefits, including life insurance and supplemental executive retirement plans. Compensation plans are designed to align the interests of executives with those of shareholders. H.R. 3269 would subject over 12,000 publicly-traded companies to the proposed requirements. While the government has yet to prove a nexus between compensation and excessive risk taking, this legislation would require regulators to promulgate rules designed to limit pay in order to discourage what they determine to be "risky behavior," placing tremendous power into the hands of government employees to interpret broad provisions that would restrict the pay and compensation of private sector employees.

Cost

The Congressional Budget Office estimates that implementing H.R. 3269 would cost about $1 million in 2010 to develop regulations and prepare reports to the Congress, and less than $500,000 per year thereafter for the SEC to monitor compliance by companies affected by the regulations. Such spending would be subject to the availability of appropriated funds.

The cost of some of the mandates in the bill would depend on federal regulations yet to be established; therefore, CBO cannot determine whether the total cost of those mandates would exceed the annual threshold established in the Unfunded Mandates Reform Act for private-sector mandates ($139 million in 2009, adjusted annually for inflation).

Amendments

Rep. Frank (D-MA):  The amendment would strike language prohibiting clawbacks of executive compensation approved by shareholders and insert language prohibiting the regulations of financial regulators from requiring recovery of incentive-based pay under arrangements in effect on the date of enactment, provided that such agreements are for a period not exceeding 24 months. (10 minutes for debate) 

Rep. Garrett (R-NJ):  The amendment, in the nature of a substitute, would replace the annual shareholder vote with a triennial vote on compensation for public companies, allow shareholders to opt out of "say on pay" provision, allow State law to preempt the bill regarding independent compensation committees, and strike section 4 of the bill (federal regulatory determined compensation restrictions).  (30 minutes for debate)