Buried in the Restoring American Financial Stability Act of 2010 (S. 3217), the massive financial reform bill currently under Senate scrutiny, are provisions governing shareholder input on executive compensation and compensation committee independence. The so-called “say-on-pay” provisions would provide for a shareholder vote on executive compensation disclosures, and require that each member of the company’s compensation committee be an independent member of the board of directors.

Specifically, section 951 of the bill provides that any proxy, consent, or authorization for an annual or other meeting of shareholders must include a separate resolution subject to a shareholder advisory vote to approve the compensation of the organization’s executives. The result of this vote would not be binding on the board of directors or management. According to a section-by-section summary of the bill, (pdf) this legislation “would not preclude an issuer from seeking more specific shareholder opinion through separate votes on cash compensation, golden parachute policy, severance or other aspects of compensation.”

Section 952 of the legislation requires members of the compensation committees of the company’s board of directors be a member of the board, and be independent so as to avoid conflicts of interest. Specifically, this section would amend the Securities Exchange Act of 1934 to prohibit the listing of any company’s stock if that company does not comply with independent compensation committee standards. In determining whether a director is independent, the national securities exchanges are directed to consider the source of compensation of a member of the board of directors, including any consulting, advisory, or other compensatory fee paid by the company to such member of the board of directors; and whether a member of the board of directors is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company. Additionally, any compensation counsel or adviser is required to be independent. The company’s proxy or consent materials must disclose whether the compensation committee has relied on the advice of a compensation consultant and whether the committee has raised any conflict of interest.

Another provision of the financial reform bill would require annual proxy statement disclosure of any compensation required to be disclosed under the Securities and Exchange Commission (SEC) executive compensation forms and any information that indicates a relationship between the executive compensation and the financial performance of the company, “taking into account the change in the value of the shares, dividends and distributions.” According to the bill summary, “[i]t has become apparent that a significant concern of shareholders is the relationship between executive pay and the company‘s financial performance for the benefit of shareholders. Shareholders are keenly interested when executive compensation is increasing sharply at the same time as financial performance is falling.”

Section 954 requires public companies to have a policy in place for the purposes of recovering money that was erroneously paid in incentive compensation to executives as a result of material noncompliance with accounting rules.

On Wednesday, the Senate by unanimous consent agreed to proceed with consideration of the financial reform bill after three failed cloture votes. Debate on the measure began on Thursday.

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