Frank, a Democrat, introduced the bill, which gives "explicit instructions to the SEC with regard to financial institutions to disallow any compensation schemes that excessively reward risk," he says.
When asked what he meant by "excessive risk," Frank declined to quantify it. "Dollar amounts are for the shareholders to decide," he says. "By excessive we mean you have to have a two-way street."
The current bill is an extension of a previous proposal crafted by the Obama administration earlier in July that would give shareholders a non-binding vote on determining executive pay, as well as require that members of compensation committees lack any financial relationships with the firm.
The new bill also aims to postpone reward for risky trades up to a year after the fact. "Compensation shouldn't kick in until a reasonable time period," Frank says, arguing that a payoff should be delayed until the ramifications of a decision are recognized, or "ripened" in Frank's words.
He goes as far to suggest that compensation already paid out for risky trades that pay off in the short run but lose money after a year may be clawed back. "Not all of it, but some of it," he says.
Borrowed from existing laws in England, the new legislation is designed to "prevent the kind of systemic risk that comes when people get paid off for taking risks and suffer no penalty when the risks go bad," says Frank.
Here are the bill's specific provisions:
- Gives shareholders of publicly held companies the right to an annual, non-binding vote on executive compensation;
- Gives shareholders the right to vote on special pay arrangements, such as golden parachutes, for executives in mergers, acquisitions or other changes in corporate control;
- Requires members of corporate compensation committees to be independent of management;
- Requires compensation consultants or other advisers to compensation committees to be independent;
- Empowers regulators to ban pay structures at financial institutions covered under the legislation that encourage "inappropriate risks" threatening the institutions' safety and soundness or the economy and financial stability.