Responding to the public furor over bonuses paid to Wall Street executives, the House of Representatives has voted to give regulators the authority to ban compensation practices that encourage banks to take excessive risks.
The passage of the measure, which represents the first piece of President Obama's overhaul of financial regulations, comes a day after the release of a report showing that nine big banks paid out a combined $32.6 billion in bonuses despite taking $175 billion in taxpayer aid to survive the financial crisis.
"If the last year has taught us anything, it's that the compensation practices of some of our largest corporations have gotten completely out of control," said Rep. Jim McGovern (D-Mass.).
Friday's largely party-line vote sent the Corporate and Financial Institution Compensation Fairness Act to the Senate, which is expected to take up executive pay this fall as part of broader financial regulatory legislation.
The 237-185 decision came as lawmakers head home for their summer recess, eager to show voters they responded to the outrage over multimillion-dollar bonuses paid out to employees of bailed-out companies such as banking giant Citigroup Inc. and insurer American International Group Inc.
The bill would give shareholders of public companies annual, nonbinding advisory votes on executive pay and so-called golden-parachute severance packages. It also would require that compensation committee members satisfy guidelines ensuring their independence from the managers whose pay they set.
A central element of the bill would allow regulators to prohibit so-called incentive compensation that encourages lenders or traders to take heavy risks that threaten the health of the bank or the financial system.
Critics say the banking meltdown was caused partly by dangerous practices such as the creation of bonds tied to subprime mortgages that minted huge paychecks but carried no accountability for the havoc they eventually wrought on the financial system.
"What this bill explicitly aims at is this practice where people are given bonuses if the gamble pays off, but don't lose anything if it doesn't," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee and the bill's chief author.
Yet, as with some other provisions of the bill, some experts questioned how much practical benefit it would have. It's unclear how regulators would assess risky practices and whether they would be able to circumscribe pay without micromanaging the banks or intruding upon the traditional workings of the financial system.
By its nature, Wall Street is in the business of risk-taking, and financially innovative products, especially when first developed, can be chancy, said executive-pay expert Brian Foley.
Rather than limiting bonuses, the key to avoiding drastic losses is to ensure that financial institutions understand the magnitude of risks across their various business lines and investment holdings, and manage those risks accordingly, he said.
"The problem isn't with the risk itself," Foley said. "It's with managing the risks and hedging the risks. In the end, pay doesn't impact risk anywhere near as much as critics think it does."
Legislators left the details of the provision intentionally broad to give regulators the latitude to interpret and implement the rule as needed, said Steve Adamske, a spokesman for the House Financial Services Committee.
The "Say on Pay" measure requiring annual shareholder votes on executive pay packages also has been criticized as potentially ineffective. Those votes would take place months after compensation is paid out and wouldn't force companies to reduce payouts if investors object. And thus far, shareholders have shown little inclination to reverse pay despite the public furor.
At the roughly two dozen U.S. companies that have voluntarily implemented say-on-pay in the last two years, shareholders have never voted down a pay package.
The House bill has been met with stiff resistance from Wall Street.
"It represents the government taking a large step into the day-to-day operations of corporate America," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry trade group that opposes the bill. "This is the beginning of a fundamental shift away from free enterprise and toward government regulation."
Banks already have taken steps to eliminate dangerous compensation practices, Talbott said.
One now-banished practice, he said, is paying bonuses to salespeople who sign home buyers to mortgage loans charging higher interest rates than they could otherwise qualify for.
Aside from the ethical implications, the practice led some home buyers to default on loans whose payments they couldn't afford.
"Companies that made bad decisions and took excessive risks are no longer in business," Talbott said. "The other companies recognize those mistakes and have adjusted their own pay practices to guarantee their own long-term health."
"We've got to act to prevent the next financial meltdown," said supporter Rep. Brad Sherman (D-Sherman Oaks).
Republicans returning to their districts appear certain to portray the legislation -- coming as Democrats work to overhaul healthcare -- as the latest effort by the Democratic-controlled Congress and White House to expand the reach of government.
Rep. Pete Sessions (R-Texas), in a comment echoed by fellow Republicans, assailed the measure as "unprecedented government intervention in the free enterprise system."
Rep. Jeb Hensarling (R-Texas) said sarcastically, "Why doesn't this do anything about Hollywood stars who make $25 million for a movie, yet the movie loses money?"
A report on Wall Street pay released Thursday by New York Atty. Gen. Andrew Cuomo's office renewed the controversy over bonuses handed out to bankers whose companies took billions in government bailouts.
Nearly 5,000 people received bonuses of $1 million or more, according to the report, including 738 employees at Citigroup Inc., which got $45 billion from the government.