Today, the House of Representatives approved legislation to rein in compensation practices that encourage excessive risk-taking at the expense of companies, shareholders, employees, and ultimately the American taxpayer.  H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act, was approved by a vote of 237-185. It represents the first piece of a larger regulatory reform package being crafted by the Financial Services Committee to address the causes of the recent financial crisis. A summary of H.R. 3269 can be viewed here.

“Along with the agreement that we announced on derivatives, this is an important step toward the comprehensive financial reform we need,” said Financial Services Committee Chairman Barney Frank. “This bill responds to the broad consensus among economic analysts and regulators that flawed compensation systems have provided excessive risk which has contributed to the recent systemic problems in the financial marketplace. Under this bill, the question of compensation amounts will now be in the hands of shareholders and the question of systemic risk will be in the hands of the government.”

Specifically, H.R. 3269 would give shareholders a “say on pay” for top executives and ensure that they have a nonbinding, advisory vote on their company’s pay practices. The bill would also require federal regulators to proscribe any inappropriate or imprudently risky compensation practices as part of solvency regulation of all financial institutions. In addition, financial firms would be required to disclose any compensation structures that include incentive-based elements. Financial institutions with assets of less than $1 billion would be exempt from the bill’s incentive-based compensation disclosure requirements and related compensation structure oversight. 

The House also approved the following amendment to H.R. 3269:

• Manager’s Amendment (Rep. Frank (D-MA):  would strike language prohibiting clawbacks of executive compensation approved by shareholders and insert language prohibiting rules from allowing financial regulators to require recovery of incentive-based pay under arrangements in effect on the date of enactment.

Today’s legislation comes in response to a broad consensus of leading finance experts, including Paul Volcker and the Group of 30 and Lord Adair Turner of the United Kingdom’s Financial Services Authority, who believe that compensation structures were a factor in the financial crisis.  Both the United Kingdom and the European Union are contemplating similar rules.

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