Nov. 10 (Bloomberg) -- U.S. Senate Banking Committee Chairman Christopher Dodd’s plan to revamp financial requlation may do little to rein in Wall Street compensation as Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank prepare to pay record bonuses.

A bill introduced today by the Connecticut Democrat would rewrite financial-industry rules. It includes a non-binding shareholder vote on executive pay, gives investors more power to elect directors and requires that publicly traded companies allow pay to be clawed back, or recouped, if it was based on inaccurate financial statements.

“For the most part it’s pretty hollow, a toothless tiger,” said Paul Dorf, managing director of Compensation Resources Inc., a pay consultant based in Upper Saddle River, New Jersey. The legislation needs more penalties if the rules aren’t followed, Dorf said today in a telephone interview.

Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.’s investment bank will hand out a combined $29.7 billion in bonuses, according to analysts’ estimates. That’s up 60 percent from last year and more than the previous high of $26.8 billion in 2007. The companies are the biggest banks to exit the U.S. Troubled Asset Relief Program.

The Federal Reserve said last month it will review the 28 largest banks to ensure that compensation doesn’t create incentives for the kinds of risky investments that brought the global financial system to the edge of collapse, prompting bailouts of firms including Bank of America Corp. and Citigroup Inc. It offered guidelines on tying pay to risk management.

Payouts for Managers

Under Dodd’s proposals, shareholders would vote on so- called golden parachutes, in which managers receive payouts when a company is acquired. The non-binding vote on compensation, or say-on-pay, has been endorsed by the Obama administration and approved by the U.S. House.

Dodd’s proposals “leave shareholders in their advisory role,” said James Post, a professor of corporate governance and ethics at the Boston University School of Management. “Management is not obliged to follow them.”

Dodd would give the Securities and Exchange Commission authority to prohibit corporations from selling shares to the public if any directors sitting on their compensation committees work for the company. The SEC would have power to exempt smaller companies from the requirement that the committee members be independent.

Advice on Pay

SEC Chairman Mary Schapiro has backed away from approving a rule this year to let hedge funds, institutional investors and shareholder groups put candidates on corporate proxy statements. Dodd’s proposal would make the so-called proxy access rule part of the law.

The measure stipulates that firms providing advice on executive pay must be hired by the board’s compensation committee, not the company.

Some shareholder advocates have said pay consultants are conflicted because the firms want to win business structuring corporations’ employee-benefits plans. That makes it more likely they will recommend lucrative pay packages for top executives, according to investor groups.

The Dodd legislation requires companies to disclose in their annual proxy statements how pay affects “financial performance.” It also mandates that corporations publish a chart that compares compensation against earnings over a five- year period.

Banking regulators would be required to ban “excessive” pay to any executive, director or employee. Bank regulators would prohibit any compensation that “could lead to a material financial loss.”

The clawback provision in Dodd’s draft legislation is significant because it would require companies to recover money from executives after an accounting restatement, said Mark Poerio, a compensation attorney with Paul, Hastings, Janofsky & Walker LLP in Washington.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: November 10, 2009 16:44 EST