Rep. Barney Frank proposed additional legislation aimed at providing shareholders with additional powers when it comes to executive compensation. The Massachusetts Democrat's proposed bill would give shareholders a chance to cast a nonbinding confidence or no-confidence vote on executive pay plans, allowing them either to ratify or disapprove of them. Similar provisions are already present in Britain, Sweden, and Australia where pay packages are rarely voted down but rather kept pay in check through fear of shareholder retribution. While no Republicans have yet endorsed the representative's bill, the Democrat-controlled Congress could pass the provision as soon as April. Given recent shareholder concerns over executive compensation, it would not be surprising to see this bill passed quickly into law.

The House Financial Services Committee has scheduled a hearing on executive compensation for March 8, 2007. U.S. Rep. Barney Frank, D-Mass., organized the hearing, which will focus on legislation designed to give shareholders more power in setting executives' compensation. Political pressure to increase oversight in Corporate America hit a high recently after shareholder outrage against Home Depot and Pfizer CEOs combined with President Bush's speech earlier this month demanding that companies tie pay to results. Notably, however, Bush stopped short of calling for either new federal rules or fresh congressional action; but, Barney Frank said he plans to go ahead with his plans to move legislation that would greatly expand shareholder powers in the Board room. On the topic, he said, "I agree with President Bush that excessive executive compensation has become a problem, but disagree with his view that we should do nothing about it." No witnesses have been listed yet; however, the hearing is scheduled for March 8th of this year.

The SEC's new executive compensation disclosure rules may have a new set of flaws after an accounting loophole for stock options and an 11th hour rule change may cloud the compensation of top executives. The loopholes, which were discovered by compensation analysts hired to draft these new filings, may undermine the SEC's ultimate goals and end up simply costing company's more money without seeing results. How so? Let's take a look...

The problems stem from a stock options accounting rule known as FAS 123R, which changed the way company's reported stock options expenses. Previously, stock options were not reported as expenses. FAS 123R changed this by saying that if companies gave stock options to executives, they had to subtract the total value of those grants from their earnings that year. This would obviously result in a huge windfall for companies issuing a lot of stock options - particularly in healthcare and technology. To avoid the huge windfall, some 900 companies changed their options vesting dates to occur before the rule went into effect. This enabled the companies to erase an estimated $8 billion of future expenses from their books - they could award these options without cost. Then right before Christmas, the SEC changed the rules again. Now allow companies to report the amount of stock options that vest per year rather than the total value of the options granted to an executive. Without the total value being reported, the summary tables on the new compensation disclosures can be extremely misleading, often changing the order of executives by compensation significantly. Since the new rules require only the top five executives in each company to report in the summaries table, there is room for many top executives to completely hide their compensation from shareholders.

Most people are now aware of the new laws aimed at curbing executive compensation by limiting the amount of money that can be put into their deferred compensation plan to $1 million (the rest incurring a 20% penalty). Democrats hail this as a final victory over a tax loophole that has allowed many executives to channel millions through a tax-free venue - which is true. The problem is that there are additional loopholes that these new regulations fail to address - loopholes that will be exploited by future executives. Consequently, these new regulations might end up hurting middle management and others while executives are free to get their money in other ways.

The main problem in corporate America is the power that most executives have over their own compensation. Ironically, in a market where shareholders are supposed to elect members of the Board to oversee management, CEO's serve as chairmans' of their own board in over 50% of all companies! This enables them to set their own pay in many cases, as management compensation is something that the board sets. Now, the problem lies in the fact that while these new regulations may limit the amount of money put into a deferred compensation account, they do not impose other limits on compensation. Therefore, executives can simply re-channel the money from these accounts to stock options, restricted stock grants, or a multitude of other venues. Meanwhile, middle management - who has very little control over their compensation - may end up paying more as a result.

Regulators made a similar mistake back in 1993, when they imposed a $1 million limit on tax-deductible CEO salary that wasn't tied to performance. This ended up being on of the major factors leading up to the explosion in the number of stock options granted to executives - a practice that was not as common before the regulations originally went into effect. In the end, the middle class ended up with a tax hike while executives ended up with more stock options. The laws we are seeing drafted today may turn out to be the same thing. Perhaps the old saying is true: history repeats itself.