A bill that would provide shareholders of public companies with an advisory vote on executive compensation and golden parachutes and that has additional special provisions regarding incentive compensation and risk management applicable to certain financial institutions has been given the green light to move to the House floor. The House Committee on Financial Services voted 40-28 on Tuesday to advance the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269).  In addition to providing shareholders of public companies with the ability to vote their approval of such executive compensation packages, this legislation requires members of public company compensation committees to be independent, and establishes an ability for the compensation committee to engage the services of independent consultants and counsel. Separately, in sections affecting financial institutions, this bill would require reporting of incentive compensation and its relationship to risk management and would authorize regulators of such institutions to prohibit compensation structures that encourage inappropriate risks. 

With regard to shareholder approval, the shareholders’ annual vote would be non-binding on the corporation or board of directors, and “shall not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board.”

As noted above, in addition to mandating a shareholder approval vote, the bill, known colloquially as the “Say-on-Pay” bill, directs appropriate federal agencies to establish regulations requiring covered financial institutions to disclose the structures of their incentive-based compensation arrangements “sufficient to determine whether the compensation structure--

(1) is aligned with sound risk management;

(2) is structured to account for the time horizon of risks; and

(3) meets such other criteria as the appropriate federal regulators jointly may determine to be appropriate to reduce unreasonable incentives for officers and employees to take undue risks that--

(A) could threaten the safety and soundness of covered financial institutions; or

(B) could have serious adverse effects on economic conditions or financial stability.”

After the above information on compensation is provided, federal regulators would draft regulations prohibiting the regulated financial institutions from awarding their executives with these compensation arrangements or incentive-based payments that are deemed to encourage such risky behavior.

The financial institutions covered by the preceding provisions include: depository institutions or depository institution holding companies, broker-dealers, credit unions, investment advisors, and any other financial institution that the appropriate federal regulators determine should included.

The entire House of Representatives is expected to consider the bill as early as Friday.