Obama administration wants mandatory 'say on pay' shareholder votes

The Treasury Department wants to bring more independence and democracy to the practice of paying CEOs and senior executives.

On Thursday, the federal agency said it would seek congressional approval for two measures. One would require all public companies to provide for a non-binding shareholder vote on executive pay starting in 2010.

The other would require the compensation committees of corporate boards to hire their own experts to advise them on pay levels. It’s not enough, said Gene Sperling, counselor to Treasury Secretary Timothy Geithner, to be independent in name only.

Just as the Sarbanes-Oxley corporate governance law mandated independence of the board’s audit committee, so too does the compensation committee need to be free from undue influence by the CEO, Sperling said.

To that end, a director who serves on a comp committee can’t have any financial conflicts with management. For example, the New York Stock Exchange considers a director independent even if he runs a company that does up to a $1 million in business with the corporation on whose board he sits. Treasury says that has to stop. (Here's a link to the NYSE's corporate governance rules.)

The Obama administration is not calling for a cap on compensation or limiting the manner in which executives get paid. Rather, it intends to rely on the power of embarrassment. Managements don’t want to lose shareholder votes on their pay packages, even if they’re nonbinding.

When they do lose, corporations will change their compensation policies. Treasury cited GlaxoSmithKline P.L.C. as having acknowledged a “major shift” when it lost such a vote in 2003.

There have been few shareholder revolts over pay packages under the United Kingdom system, on which the Treasury’s recommendations are based. But the annual votes have forced companies to be more explicit with investors on how they pay executives and why.

I’m all for greater disclosure and shareholder engagement. Too many of us don’t even look at our proxy statements, much less cast votes.

And I’d rather have good legislation than fast legislation. But in a summer where Washington is rushing to overhaul financial regulation and change health-care coverage, this looks like an easy vote for lawmakers to defend before the voters.