U.S. lawmakers last night agreed to a bailout bill, dubbed the Emergency Economic Stabilization Act of 2008, that is intended to calm jittery financial markets and provide a comprehensive solution to the credit crisis. Notably, from a governance perspective, the Act will curb some forms of executive compensation at participating firms, though it lacks an earlier draft provision that would have given shareholders a non-binding vote on compensation at the firms benefiting from federal aid.

Sections 111 and 302 of the bill, which will be voted on by members of the House later today, provide for three types of restrictions when the government makes direct purchases of troubled assets from a financial firm:

* Prohibition on executive officers of the firm from receiving “incentives . . . . to take unnecessary risks” that could threaten the institution’s value during any period that the government holds its equity or assets;

* “Claw-back” provisions, or those allowing for the recovery by the institution of any bonus or incentive pay based on financial statements proven to be “materially inaccurate”; and

* Prohibition of “golden parachute” severance payments to the institution’s senior executive officers (defined as one of the top five executives of a public company, subject to SEC disclosure requirements, and the non-public company counterparts).

If the bailout involves auction purchases of troubled assets, the golden parachute prohibition would be in effect when such purchases exceed an aggregate of $300 million.

Additionally, the bill calls for an amendment to Internal Revenue Code Section 162(m) by adding special rules on the tax treatment of executive pay at firms where the government’s aggregate bailout exceeds $300 million. Specifically, it bars tax deductions on pay that exceeds $500,000 to any CEO or CFO or any of the other three highest compensated officers.

While provisions related to “say on pay” and proxy access, or the ability of investors to nominate corporate board members, were excluded in the final legislation, governance observers predict that their inclusion in the draft bill, and growing debate over executive pay, will help spur such reforms in the near future.

“Clearly, executive pay immediately raised its head in the debate because the average citizen has been angered by executives leaving with such large payouts,” said Timothy Smith, senior vice president of the environmental, social, and governance group at Walden Asset Management. “This sends a strong signal to the business community that statesmanship would dictate they step forward and adopt ‘say on pay’ voluntarily without waiting for it to be legislated.”

Smith has a been at the center of this year’s “say on pay” shareholder campaign, which saw a consortium of investors file shareholder proposals calling for the right at more than 75 companies. Investors at 10 companies so far this year have given majority support to the proposal, while 10 companies this year and last have agreed to allow for future “say on pay” votes or did so this year.

Smith noted that acceptance of government controls on executive compensation violates a basic principle for the business community, which is non-governmental interference in compensation matters. That, coupled with recognition in recent weeks that compensation issues are a major concern not only for investors, but also the average citizen, will “auger well” for any upcoming vote on an advisory pay vote bill.

A House bill allowing for “say on pay” passed earlier this year, though companion legislation, sponsored by Illinois Senator and Democratic presidential nominee Barack Obama, has stalled. Observers say passage of full legislation will be a top priority for the next administration, whether it be Republican or Democratic.