Quick Take: CEO Compensation Bill Is a No-Brainer

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Congressman Barney Frank has put together a very simple, shareholder-friendly way to add more accountability to executive compensation. The proposed bill, which passed the House Financial Services Committee a couple of weeks ago, would give shareholders a non-binding vote on executive compensation and a non-binding vote on any new golden parachutes.

This type of voting mechanism allows shareholders to collectively express their displeasure or lack thereof with management's compensation. The vote can't change compensation, unless a company's compensation committee and management think they're being given a hint to do so. Ultimately, that's all a non-binding vote can do; this, along with the SEC's focus on making compensation agreements easier to read, are two huge improvements for shareholders. Plus it's a far better solution than any arbitrary set of caps or rules on compensation -- an idea that has also been floated around.

Frank's idea isn't a new one, either. The U.K. already allows such votes, as do the Netherlands and Australia. To anyone who thinks the vote would hurt our markets, I note that the U.K. had more IPOs than the U.S. did last year.

Aflac (NYSE: AFL) has already agreed to do this with its shareholders by fiscal 2009. But shareholders at Morgan Stanley (NYSE: MS) and Income Investor selection Bank of America (NYSE: BAC) recently rejected the idea of an annual vote. The margin of victory at Morgan Stanley was far greater than at Bank of America. This isn't a huge surprise, because when things are going well, as they are at Morgan Stanley, there are generally fewer questions.

More votes are expected, but Frank's bill is a fairly simple and measured solution -- the kind I think most people generally welcome. Plus it's a lot better than the solutions our country has a history of coming up with once things have already gone wrong.

See what else Barney Frank is up to.

Nathan Parmelee has no ownership stake in any of the companies mentioned. Aflac is a Stock Advisor recommendation. The Motley Fool has an ironclad disclosure policy.