U.S. News

Letting Shareholders Vote on CEO Pay Sparks Debate in House

By CNBC.com

A bill that would give shareholders the right to cast non-binding votes on executive pay sparked sharp comments Thursday at a subcommittee hearing in Washington.

Backers say the measure, introduced last week by Rep. Barney Frank, D-Mass, is needed to prevent fraud. But opponents say it would interfere with the free working of American companies and force executives to spend more time meeting with advocacy groups and less time on product development.

“Businesses were never designed to be democracies and their decision-making process was not established to be run like a New England town hall meeting,” John Castellani, president of The Business Roundtable, told the committee.

But Richard Ferlauto, a representative of the American Federation of State, County and Municipal Employees (AFSCME), said the measure is needed to clean up U.S. corporations.

"Incentive to Manipulate"

“Spiraling pay, not based on performance, tends to provide an incentive to manipulate earnings, obfuscate financials and, unfortunately in many cases, to cook the books,” he said.

The proposal, introduced last week by Rep. Barney Frank, D-Mass., would require the Securities and Exchange Commission to develop rules allowing investors to vote on a company’s executive pay package and “golden parachutes” if the enterprise is sold.

However, a company would not have to act on the votes.

Similar “say on pay” measures exist in the United Kingdom, Australia and Sweden.

Rep. Scott Garrett, R-NJ, said he believed Congress had the authority consider the issue, but said new SEC rules requiring greater disclosure of executive pay should be given a chance to work.

Opponents said the proposed legislation would open the door for more government regulation, setting a bad precedent for what government can and should do.

"Consider the Hypocrisy"

“Instead of looking for way to interfere in the free market, members of Congress should consider the hypocrisy of voting themselves pay raises in the middle of the night while scrutinizing how executives running companies that are the lifeblood of our economy are compensated,” Matt Kibbe, president of FreedomWorks, said in a prepared statement to the media.

Former Texas Congressman and FreedomWorks Chairman Dick Armey said: “Salaries should be set by market forces – not government regulation. Representative Frank’s proposal has a high demagoguery quotient, but does little for public policy.”

Frank serves as chairman of the House Financial Services Committee.

Interest in the measure follows investor concern over big payouts made to the former CEOs of Home Depot and Pfizer.