The Obama administration is looking to leverage shareholders against corporate executives to rein in excessive pay and compensation packages that it says led to some risky behavior that contributed to the world's financial crisis.
Treasury Secretary Timothy F. Geithner said he will push Congress to draft "say on pay" legislation that would give the Securities and Exchange Commission (SEC) the authority to require companies to give a company's shareholders a nonbinding vote on executive-compensation packages.
Say on pay - the norm for several major U.S. trading partners and a measure backed by President Obama when he served in the Senate - would encourage a company's board of directors to ensure that the paychecks of top executives are closely aligned with the interest of shareholders.
"Compensation should be tied to performance in order to link the incentives of executives and other employees with long-term value creation," Mr. Geithner said.
A public outcry erupted over executive compensation in March when news broke that American International Group Inc. (AIG) doled out at least $165 million in executive bonus pay after being awarded $170 billion in taxpayer loans and incentives.
The secretary said he also will propose legislation giving the SEC the power to ensure that compensation committees are more independent, including having the power to hire outside consultants and counsel.
Incentive-based pay often is undermined by compensation practices that "set the performance bar too low" or rely on benchmarks that trigger bonuses even when a firm's performance is subpar, he said.
Mr. Geithner made his remarks to reporters after a morning meeting with SEC Chairwoman Mary Schapiro, Federal Reserve Governor Dan Tarullo and industry experts to discuss reforming executive-compensation policies.
He added that he doesn't support legislative efforts to directly cap executive pay or bonuses.
"We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive," he said. "Instead, we will continue to work to develop standards that reward innovation and prudent risk-taking, without creating misaligned incentives."
House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, said he was pleased with Mr. Geithner's announcement, calling it "significant action to deal with the problem of compensation packages," which have been blamed for contributing to the current financial crisis.
"It is not the government's business to discourage risk-taking, but neither should we allow systems which have existed up until now whereby decision-makers are handsomely rewarded if they take big risks that pay off, but suffer no penalty whatsoever if those risks result in losses to the company," Mr. Frank said.
Mr. Frank's committee scheduled a hearing at 10 a.m. Thursday on Capitol Hill to discuss the role that executive compensation played in the Wall Street meltdown.
The Obama administration also on Wednesday named Kenneth Feinberg, the lawyer who oversaw the government's compensation fund for victims of the terrorist attacks on Sept. 11, 2001, as its "pay czar" to police compensation of top earners at companies receiving "exceptional" government aid.
Mr. Feinberg was named "special master" with authority to review - and potentially reject - compensation packages for executives at companies that have received taxpayer help.