After the nonpartisan Congressional Budget Office (CBO) calculated the enormous costs of an all-encompassing health care scheme with a bloated public option, members of Congress from both parties asked for more due diligence before rubber stamping the plan.
Yet today, the U.S. House of Representatives may rush through another piece of poorly designed command-and-control legislation that the CBO just yesterday said could have its own tremendous costs. Though advertised as giving shareholders more “say” over CEO pay, the “Corporate and Financial Institution Compensation Fairness Act of 2009 [H.R. 3269],” would give the government the power to ban performance bonuses for a wide variety of employees – including even office assistants and clerks – at a wide variety of firms.
On Thursday, July 30, the CBO Cost Estimate for the bill, sponsored by House Financial Services Chairman Barney Frank (D-Mass.), found that its mandates would place untold costs on the private sector that could reach upwards of $139 million a year. The CBO report starkly states: “The requirements of H.R. 3269 would impose several private-sector mandates … on publicly traded companies, financial institutions, institutional investment managers, and national securities exchanges and associations.” CBO adds that “because the cost of some of the mandates would depend on federal regulations yet to be established,” the total cost of the mandates may exceed the $139 million a year that under the Unfunded Mandates Reform Act, requires special scrutiny for its effects on the private sector.
As CEI has repeatedly stated, regulatory costs should be seen as a tax. And this tax on publicly traded companies – that would frustrate the incentive pay necessary to foster growth in entrepreneurial firms– may put a damper on the recent gains of the stock market and slow an economic recovery.
Here is a summary, but by no means all-inclusive list, of destructive provisions of the bill
- Broad powers to ban a broad array of bonuses for a broad set of employees at a broad definition of “financial services” firms.
Section 4 of HR 3269 establishes direct control of bonus pay for all employees of “financial institutions.” Federal regulators could ban what they deem “unreasonable incentives” that lead to “undue risks” for any employee, including a bank teller or a secretary.
This mandate would cover a variety of firms, not necessarily financial. The bill defines “financial institutions” to include banks, credit unions, broker dealers, investment advisers as well as well as any other entity that “federal regulators, jointly, by rule, determine should be treated as a covered financial institution for purposes of this section.”
These provisions would also likely coincide with sections of HR 3126, establishing a Consumer Financial Protection Agency that would regulate the pay of all employees involved in consumer credit, regardless of industry. This could include cashiers who take credit card applications. The two bills constitute and unprecedented government intrusion into private sector payments.
The connection between pay structure and “systemic risk” is tenuous. If financial products pose risk to the system, those products themselves are what should be under more scrutiny. Limiting incentive pay could itself likely lessen financial stability by reducing firms’ ability to reward long-term performance
- Why mandate costly say-on-pay mechanisms that shareholders have voted down at many firms?
The bill mandates what is called “say on pay” – the annual nonbonding affirmation of pay for top executives at all public companies. What the bill’s supporters overlook is that shareholders now have the freedom to establish say-on-pay at the firms they own, yet they have mostly rejected these schemes to regulate pay when they were placed the proxy ballot.
Only a few firms’ shareholders have approved say-on-pay resolutions when they have been on the ballot. Say-on-pay has been rejected by shareholders at companies from Disney to Abbot Labs. This means that most investors thought the process was a waste of time and company resources.
Active shareholders have other, more effective ways to align pay with performance, such as through their votes on the structure of compensation plans. So why should Congress impose on them a pay mechanism they don’t want. If Congress has to impose say-on-pay, it should go with a substitute measure by Rep. Scott Garrett, R-N.J., to allow shareholders to opt-out or have pay approval every three years rather than annually.
Bottom line: The bill threatens to curtail incentive pay that is crucial to growth and innovation.
The American public is justifiable upset at executives of bailed out firms taking bonuses. But they understand incentive pay is needed for everyone from mid-level employees to CEOs for firms to be successful. The heightened concern about Apple Inc. CEO Steve Jobs’ health demonstrates that investors know what a crucial skill set it take to run a top company. Just as the American public is not envious of actors and athletes that make high salaries because of their talents, they recognize that talents should be rewarded in the corporate boardroom too. This bill would limit shareholder choices, reduce incentives for a variety of employees, and put a damper on innovation and economic growth.