SEC Requires Say-On-Pay For TARP Firms

There really wasn’t anything unexpected about the Securities and Exchange Commission’s vote on July 1 to require companies receiving money from the Troubled Asset Relief Program (TARP) to provide a shareholder vote on executive pay in their proxy solicitations. In fact they were already following a lead set by President Obama in requiring compensation restrictions on senior managers.

But it is another boost for the “say-on-pay” movement that many socially responsible investors support as a way for shareholders to have a stronger voice in executive compensation at their companies. And while the Commission’s vote was limited just to TARP recipients, it’s followed by a 60-day comment period in which say-on-pay supporters are planning to urge the commissioners to extend the requirement to all public companies.

“The problems with executive pay are not just with TARP companies,” says Timothy Smith, senior vice president of Walden Asset Management in Boston and an advocate for say-on-pay. “We think this advisory vote should be required of all companies. That does not imply we think a majority of companies have comp problems. But there’s a significant enough cross-section of problems that they need to be addressed and this gives us one tool to do so.”

Say-on-pay is a shareholder activist strategy in which a company’s shareholders are allowed to vote on the compensation of its top executives. The vote is advisory only and does not compel a board to change its compensation practices. But proponents believe the passage of such advisory measures will encourage more dialogue between management and shareholders and prompt changes to compensation packages if stockholders believe they are excessive for one reason or another.

The Obama administration has already acted to restrain compensation packages for the highest-paid employees at large financial institutions that have received taxpayer bailout money through the TARP. A “pay czar,” as some have termed the position, has been appointed to approve compensation packages for the highest-paid employees at Bank of America Corp., American International Group Inc. and other large institutions that received bailout funds.

Say-on-pay proponents are also looking to Congress, arguing that there is a link between huge pay packages and the risky business behavior that lead to the financial crisis of late last year and this spring. There they hope that legislation that passed the House last year but died in the Senate, and which extends the TARP requirement to all public companies, will win full passage.

Smith says there are about 100 say-on-pay resolutions that shareholders will vote on at corporate annual meetings this year. So far the average vote is about 47 percent in favor of the resolution, with 19 actually approved, meaning they received more than 50 percent.