House Passes Compensation Legislation

By W. Bernard Mason

On July 31, 2009 the House of Representatives, by a vote of 237 to 185, approved H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act of 2009. Republican opposition centered primarily on Section 4 of the bill that requires financial institutions to file reports with their appropriate federal regulator regarding any incentive compensation plans and authorizes federal regulators to intervene in any instance where such a program could threaten the safety or soundness of the institution or have serious adverse effects on economic stability. Republicans also objected to the concept of an annual, non-binding shareholder vote on compensation, arguing instead for such a vote once every three years. Republicans argued that the provisions of H.R. 3269 should apply exclusively to TARP recipients and other beneficiaries of taxpayer funds.

Rep. Scott Garrett (R – NJ) said the odd thing about the legislation is that it “gives with one hand, and takes with the other”. It allows shareholders to vote on pay, but it permits the government to later say the shareholders made an incorrect decision and allows some bureaucrat to make the final decision. He said the bill will create unintended consequences and may worsen undesirable aspects of compensation arrangements. He also said he has seen no factual proof that the underlying cause of the current crisis was excessive pay.

Rep. Mel Watt (D – NC) stated that the House debate “is a commentary on how out of whack our whole system has become”. He said this was a modest bill, providing for a nonbinding shareholder vote on executive compensation plans. He said the opposition is arguing that the owners of a company should not have the right to express their opinions on compensation to the officers of the company. He said this was not the government taking over corporate decision-making, not even with respect to the financial industry.