Frank's bill seeks greater disclosure of executive pay

WASHINGTON -- US Representative Barney Frank proposed legislation yesterday to address ''runaway" executive pay at a time when some corporate chieftains have reaped huge payoffs despite turning in lackluster performances or even engaging in fraud.

If it became law, Frank's proposal would not set limits on executive pay, but would require companies to devise an ''executive compensation plan" that includes details about the personal use of corporate jets and the performance targets that determine compensation. The plan also would include provisions for recapturing bonuses that later financial results show were unwarranted.

The executive compensation plan would require shareholder approval. Separate shareholder approval would be needed for golden parachute packages awarded to executives who receive large paydays as a result of mergers.

The proposal by Frank, of Newton, the top Democrat on the House Financial Services Committee, followed a recent study by two advocacy groups that found that the 2004 ratio of average chief executive pay to worker pay was 431 to 1, up from 301 to 1 the previous year. The groups, United for a Fair Economy and the Institute for Policy Studies, noted that average chief executive pay at the nation's largest companies last year was $11.8 million.

According to Frank, excessive compensation can give executives incentives to manipulate earnings or make mergers or acquisitions that are not in shareholders' best interests.

''We have witnessed a number of high-profile executive pay packages that are hidden to the owners of the company, the shareholders, and I want to make sure we have full disclosure," Frank said in a statement during a press conference here.

Several Democrats joined Frank in supporting the bill. Frank said he hoped to attract support from Republicans, who hold the majority in Congress.

''The unhappiness at these kinds of things is bipartisan," Frank said.

Some corporate governance specialists noted that the Securities and Exchange Commission already requires public companies to disclose extensive information about executive pay.

''I think they're trying to solve this not in the best way," said Babson College finance professor Richard Bliss. ''Most of this stuff is already disclosed."

Aides for Frank disagreed, saying the bill would shed more light on deferred compensation and perks.

According to Bliss, the best way to address compensation issues is to make corporate boards more responsible to shareholders and do a better job of tying executive pay to performance. Bliss noted that many large institutional shareholders are already pressing for such changes.

Companies that overpay their executives often end up in trouble, said Scott Klinger, part of the United for a Fair Economy team that cowrote the recent report on executive pay. He cited Tyco International Ltd. and Enron Corp. as examples.

One problem is that today executive pay is often set by a company's board and its compensation committee, and the atmosphere is so ''clubby" and ''incestuous" that big pay packages often result, Klinger said.

Frank was joined at his press conference by Massachusetts Secretary of State William F. Galvin, who investigated the recent sale of Gillette Co. to Procter & Gamble Co. With that recently completed acquisition, former Gillette chief executive James M. Kilts was in line to receive a compensation package valued at $165 million.

''The wild imbalance in executive compensation and the often perverse incentives that accompany them encourage CEOs to sell out the best interests of their shareholders," Galvin said in a statement.

In a September speech, Kilts said his compensation was tied to performance and mostly unrelated to Gillette's sale. Since 2001, when he took over, more than $27 billion in shareholder value was created, he said. Gillette's sale was overwhelmingly approved by shareholders.

Harvard Business School professor Jay Lorsch said legislation may not be the best way to address excessive pay.

''I'm an advocate of the business community cleaning this up themselves," Lorsch said. ''What I hope would happen is that while Barney is drafting this law, the business community gets alarmed and decides to fix things themselves."

Chris Reidy can be reached at reidy@globe.com. Alan Wirzbicki reported from Washington; Chris Reidy from Boston.