A key House committee approved legislation Tuesday that would allow regulators to ban executive pay plans that encourage too much risk taking by financial institutions or their officers.
The legislation, which passed the House Financial Services Committee by a 40-28 vote, declares that it would “reduce perverse incentives.” The bill is a reaction to public and political outrage over the multimillion-dollar bonuses given to executives and employees of firms bailed out by taxpayers. The measure goes further than President Obama had recommended.
The House could vote on the bill as early as Friday. It would also have to be passed by the Senate, a bigger hurdle, before going to the president for his signature.
The populist reaction to executive compensation occurs just as Congress is preparing to leave for its August break, when representatives can expect to get an earful from disgruntled constituents who are unemployed or are worried they might lose their jobs.
Outrage has focused on American International Group, the giant insurance company whose risky products pervaded the derivatives market. AIG paid out $165 million in bonuses in March after receiving a $180 billion bailout from the Treasury Department and the Federal Reserve.
U.S. banks paid out another $18 billion in year-end bonuses while the economy was in free fall late last year. Those payments enraged the public as job losses soared in the wake of a financial crisis that many attribute to excessive risk-taking by highly leveraged banks and other financial institutions.
The bill approved in committee Tuesday would empower regulators to reject compensation plans that could threaten the safety of the financial institution or have adverse effects on economic conditions or financial stability. The bill also directs the Securities and Exchange Commission to set rules and standards for compensation committees of boards of directors.
The bill would give shareholders a nonbinding vote to approve executive compensation at all public companies. It would also establish procedures for shareholder approval of “golden parachute” compensation related to mergers and acquisitions.
“There is a risk to the system when the incentive structure is huge,” said Rep. Barney Frank, Massachusetts Democrat, who heads the committee.
Allowing regulators to ban compensation plans would effectively empower government to determine pay, Republicans charged.
“The government should not be in a position of setting executive compensation,” said Rep. Spencer Bachus, Alabama Republican, who is the committee’s ranking member.
The U.S. Chamber of Commerce vigorously criticized the legislation. The bill would “create a command and control regulatory scheme that would restrict economic growth and job creation,” said Tom Quaadman, executive director of the chamber’s Center for Capital Markets Competitiveness. “It moves the government into the role of setting compensation policies for virtually every employee of all financial firms.”
The committee vote occurred after Goldman Sachs earlier this month reported record profits for the second quarter and revealed that it had set aside $11.4 billion during the first half of 2009 to compensate employees. At that rate, Goldman Sachs will be able to pay each employee nearly $800,000 this year.
Goldman, which has repaid the $10 billion capital injection it received from the federal government in October, has also received $12.9 billion in taxpayer funds from AIG to settle its derivative contracts with the insolvent, government-controlled insurance company.