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Accountability on Executive Compensation
June 10, 2009
03:18 PM EST
03:18 PM EST
Today Treasury Secretary Geithner announced that the Administration is calling for new measures to ensure executive compensation is structured in the best interest of companies, including the shareholders. As he explained, these measures are not simply about fundamental fairness, they are about the fundamental stability of our financial system:
This financial crisis had many significant causes, but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage.
Secretary Geithner spelled out five guiding principles for executive compensation to ensure that executives and shareholders’ goals remain aligned: it should be legitimately tied to performance; it should reflect long-term gains and risks; it should take into account sound risk management, rather than rewarding risk above all; golden parachutes should only be granted when in the long-term interest of the company; and compensation should be as transparent and accountable as possible.
One key proposal along those lines is "say-on-pay" legislation that would give the SEC the authority to require non-binding annual say-on-pay votes for all public companies. In essence, shareholders would get a powerful moment of transparency and accountability for the executives of the companies they own, and an opportunity to disapprove where they see the kind of greed and misguided incentive schemes that wrought havoc on individual companies and in turn the broader economy in recent years. As Secretary Geithner pointed at, this kind of provision "has already become the norm for several of our major trading partners."
A second proposal would require the SEC to issue rules and guidelines insuring that the compensation committees that help decide executive compensation are completely independent from the executives they are rewarding or punishing. In turn, those committees with protected independence would be given the responsibility and the resources to hire their own independent compensation consultants and outside counsel. It is hardly difficult to imagine how the lack of independence of the committees setting compensation from the executives they were granting it to has contributed to the crisis we see today, and to the losses shareholders have seen as they were the only ones not in the loop.
You can also read Secretary Geithner’s full statement to get a more thorough explanation, one more brick in America’s new foundation.
Related Topics: Economy