WASHINGTON (Reuters) - Eye-popping Wall Street bonuses could be banned by the U.S. government if pay packages are deemed to encourage “inappropriate risks,” under a bill approved on Friday by the U.S. House of Representatives.
The bill would allow regulators to prohibit incentive-based pay packages at large financial institutions if the packages are found to induce excessive risk-taking. Institutions with assets of less than $1 billion would be exempted.
The bill would also give shareholders in public companies the right to cast annual, nonbinding votes on executive pay, offering them a louder, if largely symbolic “say on pay.”
In addition, the legislation would require new standards of independence from management for corporate compensation committees and compensation consultants.
Heading next to the Senate, where its outlook is uncertain, the measure raises to a new level Washington’s efforts in recent years to restrain the high pay of elite financial managers, a perennial problem in U.S. corporate governance.
House passage of the measure also represents progress for efforts by the Obama administration and congressional Democrats to tighten bank and capital market oversight amid the worst financial crisis in generations and a stubborn recession.
Executive pay is out of control, even as many Americans struggle to stay in their homes and keep their jobs, said Democratic Representative James McGovern, in floor debate.
“Corporate executives are continuing to give themselves multimillion-dollar pay packages ... The misbehavior in corporate America must come to an end,” McGovern said.
Republicans criticized the House bill, largely echoing complaints from legions of business lobbyists fighting to block it and other Democratic financial regulation reforms.
Republican Representative Pete Sessions said the bill would “undermine confidence in corporate America” and amount to “a government takeover of the free enterprise system.”
The executive commission of the European Union has proposed letting national authorities fine or raise capital requirements on banks whose pay policies encourage too much risk taking.
Germany’s lower house of parliament, the Bundestag, last month approved a law placing restrictions on executive pay.
Passage of the U.S. House bill came a day after a report that more than 4,700 bankers and traders got 2008 bonus payments of $1 million or more at large banks bailed out by taxpayers.
In spite of a dismal year on Wall Street, the report by New York Attorney General Andrew Cuomo said bonuses paid at nine bailed-out banks exceeded some of the banks’ annual profits.
Calling high pay levels “vulgar,” Democratic Representative Brad Miller said, “We are now in the worst economic downturn since the Great Depression and we have been perilously close to a financial collapse ... We know what went wrong, essentially the same things that went wrong in the 1920s. Corporate executives were looting their companies ...
“The idea that corporate executives were acting in the best interest of their shareholders is simply a farce.”
Republican Representative Jeb Hensarling said in House floor debate that some of the Democrats’ rhetoric on the pay bill “seems like a lot of recycled class warfare to me.”
Congress in February restricted bonuses and other forms of pay for top managers at banks and companies that got help under the government’s $700-billion financial industry bailout, the Troubled Asset Relief Program, or TARP.
Some banks, such as Citigroup, have not repaid their government aid and must adhere to the limits. Others, such as Goldman Sachs, Morgan Stanley and JPMorgan Chase, have repaid and are now free of the restrictions.
Goldman Sachs this month reported sharply higher quarterly profits and set aside $6.65 billion for compensation, putting its average employee on pace to earn $900,000 in 2009. The firm last year accepted $10 billion of taxpayer aid.
President Barack Obama is pleased with the House pay bill, White House spokesman Robert Gibbs said on Thursday.
The administration has an executive pay proposal, as well, but it does not include empowering regulators to ban too-risky incentive-based pay at banks and other financial firms. It does call for an investor “say on pay” and more board independence.
The House, where Democrats are firmly in control, passed a stand-alone ‘say on pay’ bill in April 2007, but it died in the Senate, where Republicans hold a stronger minority position.
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Editing by James Dalgleish