The House of Representatives may vote as early as Friday to give regulators the power to ban incentive pay at banks and give shareholders the right to vote on bonuses. The bill, adopted by the House Financial Services Committee, is Congress's response to the outcry from the public over Wall Street excessive compensation, especially by banks that took bailout money from the government.
No Republican voted for the measure because they say this bill essentially gives the government the right to determine pay.
While shareholders will be given the right to an annual vote on salary and bonuses for top executives at all U.S. public companies, these votes will be non-binding. Companies can ignore the votes, but at least compensation for executives will become a more visible issue.
The most important change is that members of a corporate board's compensation committee must be independent, which means the compensation committee can't include executives or employees of the company. Hopefully, these independent board members will put making money for the shareholders as their top priority.
Public company executives seem to forget about shareholders when it comes to setting pay, such as Morgan Stanley increasing pay for employees by 25 percent even though it reported losses for the quarter. It's time for shareholders to at least have a vote. It would be even better if the vote held more weight.
Some smaller companies will be exempt from these new compensation rules. The committee approved the bill giving the SEC flexibility on setting regulations for small companies.
As expected, the U.S Chamber of Commerce immediately opposed the bill and said it would "restrict economic growth and job creation," Bloomberg reported.
Let's hope that even the threat of a ban will get banks, especially those still living on public financing, to revise their bonuses to reward employees through compensation that emphasizes long-term company growth rather than short-term risky investments.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.
Why do investors make the decisions that they do?View Course »