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The thorny issue of how financial firms that took government bailout money compensate their executives will be publicly aired this proxy season.

The recently enacted Stimulus Package requires most of the 400 companies that took TARP (Troubled Asset Relief Program) money to provide their shareholders with a non-binding vote on executive compensation. Observers expect bank boards to pay close attention to the results of these “Say on Pay” votes, noting that not doing so could provoke further public criticism and reputational damage.

Socially conscious investors have been pounding the table about unreasonable executive compensation for a number of years. In 2008, proposals advocating for an annual shareholder Advisory Vote on executive pay at Bank of America, Bank of New York Mellon Corp., and Goldman Sachs Group, Inc. each garnered support from more than 45% of outstanding shares.

Now, the momentum is building. During the presidential campaign, Barack Obama repeatedly urged regulators to adopt new rules to give shareholders a greater voice in setting executive pay for all public companies. Legislation embedded in the Stimulus Package bars top executives at large banks that received rescue money from receiving bonuses that exceed one-third of their annual pay.

But it doesn’t stop there. “Abusive perks” such as paying a CEO’s country club membership dues or taxes, and providing “golden coffins” (paying the families of deceased CEOs their salary for several years) are coming under fire. And, shareholders are seeking ways to institute “clawback” provisions that would require a CEO to reimburse a portion of bonus money if the company restates earnings or in a situation of CEO misconduct.

The Obama team’s plan will call for increased oversight of executive pay at all banks, Wall Street firms, and other companies as part of a sweeping overhaul of financial regulation. Officials have said that the plan would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could put the entire financial system at risk.

The new rules could cover all financial institutions—even those not receiving any federal bailout money. Officials say the new rules could also be applied more broadly to all publicly traded companies.

The New York Times reports that the new regulatory plan could be a signal that Mr. Obama intends to crack down on many of the risk-taking and free-wheeling practices by the financial industry that resulted in the global economic meltdown.

Sources: American Banker, New York Times