US plans new rules to check corporate bonuses

The US administration will soon bring out new rules that would set restrictions on executive pay for firms receiving federal bailout funds, treasury secretary Timothy Geithner said.

Geithner said the government need not bring in further legislation on compensation beyond the administration's say-on-pay proposal and the proposal for independent compensation committees.

"We do not believe it's appropriate for the government to set caps on compensation," Geithner said, adding that setting rules on pay could only be "counterproductive."

US Securities and Exchange Commission chairperson Mary Schapiro also said her agency's proposals on pay are "very much in flux still" and that the SEC would not dictate compensation levels.

Geithner said the administration is calling for new measures to ensure executive compensation is structured in the best interest of companies, including the shareholders. ''These measures are not simply about fundamental fairness, they are about the fundamental stability of our financial system,'' he said.

While this financial crisis had many significant causes, he said, executive compensation practices were a contributing factor. ''Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage.''

Geithner said the guiding principles for executive compensation should be performance, long-term gains and risks of the company, sound risk management, long-term interest of the company and transparency and accountability.

One key proposal along those lines is "say-on-pay" legislation that would give the SEC the authority to require non-binding annual say-on-pay votes for all public companies. In essence, shareholders would get a powerful moment of transparency and accountability for the executives of the companies they own, and an opportunity to disapprove where they see the kind of greed and misguided incentive schemes that wrought havoc on individual companies and in turn the broader economy in recent years. Geithner, however, said this kind of provision "has already become the norm for several of our major trading partners."

A second proposal would require the SEC to issue rules and guidelines insuring that the compensation committees that help decide executive compensation are completely independent from the executives they are rewarding or punishing. In turn, those committees with protected independence would be given the responsibility and the resources to hire their own independent compensation consultants and outside counsel. It is hardly difficult to imagine how the lack of independence of the committees setting compensation from the executives they were granting it to has contributed to the crisis we see today, and to the losses shareholders have seen as they were the only ones not in the loop.