Bank Reform Bill Draws Doubt - Plan May do Little to Curb Executive Pay

11/12/09
The Record

A Senate Plan to overhaul financial regulation may do little to cub pay as Goldman Sachs, Morgan Stanley and JPMorgan Chase prepare to award record bonuses.

A bill introduced this week would give shareholders a non-binding vote on executive pay, grant investors more power to nominate board members and allow companies to recoup pay based on inaccurate financial statements.

“For the most part it’s pretty hollow, a toothless tiger,” said Paul Dorf of Compensation Resources, a pay consulting firm in Upper Saddle River. Dodd’s measure needs more penalties, Dorf said.

The three banks will hand out an estimated $29.7 billion in bonuses. That’s up 60 percent from last year.

Sen. Christopher Dodd's plan to overhaul financial regulation may do little to curb pay as Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.'s investment bank prepare to award record bonuses.

A bill introduced this week by the Senate Banking Committee chairman would give shareholders of publicly traded firms a non-binding vote on executive pay, grant investors more power to nominate board members and require that companies allow pay to be clawed back, or recouped, if it was based on inaccurate financial statements.

"For the most part it's pretty hollow, a toothless tiger," said Paul Dorf, managing director of Compensation Resources Inc., a pay consulting firm based in Upper Saddle River. Dodd's measure needs more penalties if the rules aren't followed, he said.

Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.'s investment bank will hand out a combined $29.7 billion in bonuses, according to analysts' estimates. That's up 60 percent from last year and more than the previous high of $26.8 billion in 2007. The companies are the biggest banks to exit the Troubled Asset Relief Program.

The Federal Reserve said last month it will review the 28 largest banks to ensure compensation doesn't create incentives for the kinds of risky investments that brought the financial system to the edge of collapse, prompting bailouts of firms including Bank of America Corp. and Citigroup Inc. The central bank offered guidelines on tying pay to risk management.

Dodd said his legislation is aimed at giving investors more influence over corporate-pay decisions.

'Very difficult'

"Having Congress try and deal with this is very difficult," Dodd told Bloomberg Television Wednesday. "By saying shareholders, the owners of corporations, ought to be the ones to decide these things — I shouldn't think that's a radical thought."

Under Dodd's proposals, investors would vote on so-called golden parachutes, in which managers get payouts when a company is acquired. The non-binding vote on compensation, or say-on- pay, has been endorsed by the Obama administration and approved by the House of Representatives.

The Connecticut Democrat's measures "leave shareholders in their advisory role," said James Post, a professor of corporate governance and ethics at the Boston University School of Management. "Management is not obliged to follow them."

Compensation panels

Dodd would give the U.S. Securities and Exchange Commission authority to prohibit corporations from selling shares to the public if any directors on their compensation committees work for the company. The agency would have power to exempt smaller firms from the requirement that panel members be independent.

SEC Chairman Mary Schapiro has backed away from approving a rule this year to let hedge funds, institutional investors and shareholder groups put candidates on corporate proxy statements. Dodd's plan would make so-called proxy access part of the law.

The clawback provision is significant because it would require firms to recover pay from executives after accounting restatements, said Mark Poerio, a Washington-based compensation attorney with Paul, Hastings, Janofsky & Walker LLP.

Regulators would be required to ban "excessive" pay to any executive, director or employee and would prohibit any compensation that "could lead to a material financial loss."

'Slippery slope'

The term "excessive" could lead to a "slippery slope," Poerio said. "I see now that language opening the door for Congress and regulators to insinuate themselves into that dialogue."

The legislation would stipulate that firms advising on pay be hired by the board's compensation committee, not the company.

Some shareholder advocates have said pay consultants may have conflicts of interest because they also seek contracts to structure companies' employee-benefits plans. That makes it more likely they will curry favor by recommending lucrative pay packages for top executives, according to investor groups.

Dodd's plan requires companies to disclose in their annual proxy statements how pay affects "financial performance." It also mandates that corporations publish a chart that compares compensation against earnings over a five-year period.