tv [untitled] CSPAN June 12, 2009 3:30am-4:00am EDT
mandatory limits on anyone's pursuit of their american dream. as someone aspires to be the next bill gates, oprah winfrey, warren buffet or charles schwab we should tell them this guy is the limit, go for it. not we are the congress, you will not be allowed to go beyond the tenth floor and by the way, take the stairs. i will be first to admit compensation
and for holding this hearing. this issue promises to be one of the most important regulatory reform legislation. recently there's been a number of characterization's of efforts to reform executive compensation structures on wall street in the wake of the worst economic crisis since the great depression many financial industry leaders have insisted ceo compensation is self correcting. the urge inaction on reform existing shareholder media scrutiny has moderated pay for leaders of poorly performing
companies. they claim if we enact stronger reform our financial talent will be driven overseas and economic recovery will be delayed. what is missing from the argument is clarity and reason. for the 175 executives whose companies helped fuel the current economic crisis that required hundreds of billions of dollars in taxpayer assistance i believe a compensation overseer should have the discretion to determine whether or not these companies compensation packages or reasonable in any other industry when someone takes excessive risks that lead to a monumental failures there are repercussions. wall street seems to expect a separate set of rules. for my constituents the double standard is nothing new. they know 30 years ago ceos to come 30 to 40 times what average workers made and now that number has exploded to 344 times an average worker's pay. they know why all the average ceo pay dropped by $1 million
last year many average workers were laid off. they know that the average bonus payment to wall street executives represents more they hope to earn over a lifetime. and they know that once again, mean st is paying for the actions of wall street. my hope is industry leaders understand cause for executive pay reform are not retaliation for the current economic reality but rather attempt to assure a new era of corporate responsibility. i hope the executives realize performance incentives tied to the long term success and soundness of an institution are essentials if we hope to monitor system at risk and restore confidence in the markets. with that in mind i look forward to working with the administration and the chairman of this committee. thank you, i yield back. >> the gentleman from new jersey is recognized. >> i appreciate the gentleman who just spoke on his comments and i appreciate the witness is
here today and the chairman holding this hearing. today we are exploring compensation structure and systemic risk. to me, as i look at it the federal government is the one that poses the single biggest risk and it's not even close. part of the reason the government opposes such a large risk is the misguided federal policies we've seen. yet government officials with long-term track record of success continue to come forward with proposals with 1 degree or another dictate private firms how they should properly compensate executives and measure performance. there's certainly room for improvement on particular companies putting together compensation practices and the extent this discussion today says the gentleman from the other side just made the comment helps to inform boards as they take a closer look up the compensation policies that could all be a positive development but i have a problem and i believe the american people are growing weary of recent government over reach into the private sector.
with the government owning gm and with the way double-fault was disregarded and the chrysler bankruptcy case, dangerous actions are taking place which would create an uneven playing field increasingly inject political decisions with sell any unintended consequences into the economy so individual boards from companies have responsibility for establishing compensation packages that not only take into account the long-term best interest of the company and shareholders will also allow them to attract the best available talent. this is a fundamental underpinning of the free-market economy and it shouldn't be put in the hands of government bureaucrats. with that, i yield back. >> the gentleman from florida for two minutes. is he here? we will hold off then. let me go to the gentleman from texas, mr. neugebauer.
>> we have formed taxpayer support in cities and that is what the american people were in price to be shareholders in companies in many cases they wouldn't have invested on their own but unfortunately that marriage was made, and i would guarantee if you think the marriage isn't working very well we until you see the divorce as we try to unravel but it looks like we are moving in the direction of increasing the consequences of this marriage. one of the things like is ironic is we are focusing on compensation fraud and performance. and one of the things that's most embarrassing about all of this is we have people that have never run anything trying to tell companies how to run their own business. we have people that the only risk they may have ever taken is to buy a lottery ticket chongging to tell companies how they should move forward with business plans.
and the american people, one, we need to get them out of these businesses and a structure that ends the bailout and the government picking winners and losers and more important puts a market discipline into these companies. letting them feel knowing there's consequences if you think shareholders will have an uprising wait until they think they are about to lose their investment. today we send the signal you may not lose your investment or more importantly as we say to the american people guess what, you didn't like shares in that company? we are going to buy them for you because we are the government and we know the best investment of the american taxpayers' money , and by the way we don't have this money. this is money we are borrowing from china and japan and people we are having to buy energy from on a basis. the american tax payers are tired of being shareholders. let's get them out and get an exit strategy and more important let's not let the federal
government encroach on the business any more than. >> the gentleman from california >> thank you. i would like to begin by thanking you for facilitating this hearing this morning. executive compensation has been complicated and reoccurring issue in our discussions on financial reform. as you mentioned, compensation that promotes excessive risk is a systemic concern. to that end, what occurs in financial centers such as manhattan and charlotte affect 71 across the country including residents from my district california. some of the compensation packages that were lavished on top executives are mind boggling. former executives such as merrill lynch john fame or countrywide's angela lizilo were collecting into the millions while running their companies into the ground. to the extent these ceos and others were incentivized to produce short-term profits they
were equally as innocent lives to flood the market with predatory loan products such as supply and mortgages, weaken the prospects for financial gains and increased the systemic risk. as a result of this increased systemic risk the american taxpayer has been asked to bail out financial institutions through liquidity tools such as capital purchase program the term asset backed securities loan facility or talf. that isn't a gift but a loan from the public and requires certain protections. one of these protections is a pay star who will place transparency into the system so the public shareholders are properly informed. bonus compensation poses a risk it merits limits. i thank the witnesses for helping frame the discussion on which bonus compensation limits may be appropriately and in systemic risk. that said no t.a.r.p. recipient
should have souder is capped by the president or the congress. thank you. i yield back the balance of my time. >> we will do one more minute to mr. moore. i apologize, we will go to mr. campbell. >> thank you, mr. chairman. you know, there's no argument there been instances, a number of them and which people and companies have been paid a great deal for not much performance. the question is what do we do about it? as someone who has designed compensation plans for hundreds of the employees in my 25 year career i will tell you it isn't easy and sometimes people too much for too little and sometimes paid people to a little for too much performance, for a lot of performance and the idea that somehow some washington bureaucracy, washington bureaucrat can do this better than people in the business and the company is simply ludicrous.
also i believe the idea of having a direct shareholder vote opens the idea of direct democracy within corporations which leads to the question should be also have them approved union contracts and approve major expenditures, etc. all of which arguably have done more to bring companies down over the years than excessive compensation. instead in my view the sec is moving in the right direction by giving shareholders greater rights to make nominations and changes in the board of directors so that when they get too cozy with management and i yield back. >> finally the gentleman from michigan, mr. peters. >> thank you for holding the hearing and for your leadership on this issue. it's estimated as many as 100 million americans owned stock in individual accounts or mutual fund and those investors have lost trillions in the stock market decline. there is no doubt one of the causes of the financial crisis was executive compensation schemes in places of the largest institutions from the top
executives to the traders on the floor people were receiving compensation packages that emphasize short-term gains rather than rewarding long-term growth and shareholder wealth. i'm happy the obama administration announced they are taking steps to address the issue by calling on the congress to pass legislation that requires companies to hold advise risch shareholder vote on compensation and mandating corporate boards independent compensation advisers. tomorrow i will be introducing legislation that will do that and more. will also include a number of provisions i believe will reform corporate governance, practices by in power and shareholders to have a greater oversight over the management of the companies that the unknown. i look forward to hearing testimony today. thank you. >> ai thank the members and we will begin with -- let me say we have an important subject and as always too many members on the committee and i'm going to hold everybody strictly to the five minute rule. no one will be recognized after
the five minutes be we will allow witnesses to give a short answer to finish up, and if you ask a complicated question with 30 seconds left it will be your fault if you don't get a serious answer. we will begin with mr. sperling. >> thank you, chairman frank, ranking member bachus. it's very good to be here. i appreciate your holding this hearing. i think there is little question that one culture bidding factor to the excessive risk that was essential to the crisis was the prevalence of compensation practices at financial institutions that encouraged short-term gains to be realized with little regard to the potential economic damage such behavior could cause of only to those firms but to the financial system and the economy as a whole down the road. compensation structures that permit key executives and other financial restitution is to avoid the potential lt#@rbrb@ @i
also the care and writer one must take to ensure well-intentioned actions do not lead to unintended consequences. i will mention a few of the principles the secretary geithner linda out, a couple of examples and then i look forward to the discussion. one, compensation should accurately measure and reward performance and i think this is an important issue. it is a lot easier to get everybody to agree that performance page should be performance related but it is a lot more complex to find out what is the right mix of metrics that ensures that it is true performance? simply using stock as they say can confuse brains for a bull market and on the other hand not properly reward an executive who may be doing enormously well in a difficult economic time. negative one of the things we should study carefully is the mix of metrics that rewards
performance in fact and not just the name. second, compensation should be structured in line with time horizons. the right time horizons. a friend of mine said recently it is like there is an entire industry, in tire sets of financial actors which are able to realize private gains in a single and you're for risks they are creating over a 30 year period which could be externals by east to either the firm or as we have seen the economy as a whole. we need to have structures that help internalized those risks to make sure that we are having, that is not easy for financial actors to simply put off the potential harm they could be leading to their firm, shareholders and economy as a whole. third, compensation practice should be aligned with sound risk management.
now, this authority independence of risk managers within firms issuing their independent compensated well is most important when you're going through a period of excessive optimism where asset appreciation can temporarily make the reckless look why is and prudent look overly risk at first. former federal reserve chairman william chesney martin said the job is to take away the punch bowl when the party starts getting interesting. likewise, risk managers must have the independent stature and pay to take the car keys away when they believe a temporary good time may be creating even a small risk of a major financial accident down the road. fourth, we should examine whether the prevalence of golden parachutes and supplemental retirement packages from the aligned the interest of executives with shareholders. bebchuk will be speaking to
provide its tickets with substantial amounts of stealth compensation not transparent to shareholders that is largely decoupled from performance. and concerning golden parachutes, there is more evidence they are prevalent, not tied to performance or even mergers and acquisitions, and i fear that they leave the understandable in persian there's a double standard in the economy when the top executives are rewarded for failure at the same time working families are forced to sacrifice. finally, we believe that it is important to have greater transparency and independence. the sale on pay legislation chairman frank has long sponsored which president obama and senator obama was a co-sponsor and senate would be a very significant move forward in terms of transparency and accountability, the evidence in
the u.k. shows it has had a positive impact and in terms of the independence of compensation committees i will say briefly we start with the same premise s chairman frank that independence in the name doesn't mean in fact but we do believe if you gave the committee the funding and the authority to be the haulier some of the compensation consultants and the council and you had the sec go forward to ensure reduction or elimination of conflict of interest for compensation consultants it is our hope we would at least make progress and move the ball forward. thank you. >> thank you, mr. alvarez. >> thank you for the opportunity to offer the federal reserve's. compensation practices and financial firms and other business organizations can have a significant effect on the safety and soundness of banking
organizations and on financial stability. compensation of arrangements which include a salary, bonuses, retention bonuses and other forms of compensation and any type of organization serves several important and worthy objectives. for example they are important for attracting skilled staff, promoting better firm and a employee performance, promoting employee retention, providing retirement security to employees and allowing the firm's cost base to move along with its revenues. it is clear however that compensation arrangements can also provide executive stanton police with incentives to take excessive risks that are not consistent with long-term health of the organization. this misalignment of incentives can occur at all levels of the firm and is not limited to senior executives. in addition, incentives built on producing sizable amounts of short-term revenue or profit can encourage and police to take
substantial short or long-term risks beyond the ability of the firm to manage just so the employees can increase their own compensation. risk-management controls and frameworks have proved incapable of loan of acting as a brake on excessive risk-taking where compensation programs have created overly strong incentives to take risks. these and other weaknesses in the ways firms have bought about and implemented compensation programs have become apparent during this period of economic stress. as a result many financial firms are now re-examining the compensation structures to better align the interest of managers and other employees with the long-term health of the firm. the federal reserve is also actively working to incorporate the lessons learned from recent experience into our supervisory activities. the federal reserve played key role in the development of the principles for some compensation practices issued by the multinational financial stability board in april, 2009.
in addition, we are in the process of developing our own enhanced guidance on compensation practices at u.s. banking organizations. the broad goal is to make incentives provided by compensation systems at these institutions we supervise consistent with prudent risk-taking and safety and soundness. in developing this guidance we are trawling on expertise within the federal reserve as well as research from the brought it to the community and other compensation industry experts. our investigations suggest there are certain principles that should guide efforts to better align compensation practices with the safety and soundness of financial institutions. first, to be effective compensation practices must be properly aligned throughout the financial firm. this includes careful review and construction of compensation programs at the level of middle management, traders and other individuals who can alter the
risk profile of the firm. firms' boards of directors and supervisors must broaden the scope of the review of compensation practices beyond the traditional focus of senior executives. second, compensation practices must take account of the risks of the activities and transactions conducted by the firm and not simply be based on target's for short-term profits, revenues or volume. substantial financial awards for meeting or exceeding revenue or other performance targets without due regard for the risk of the activity can create incentives to take on sound risk. moreover incentives that reward good performance but do not adjust compensation downward when risks or increased or performance targets are missed or not effective in limiting risk. third, or can and should be done to improve risk management and corporate governance as it relates to compensation practices. this will involve more active
engagement by world board of directors and risk-management functions in the design and implementation of compensation arrangements firm wide. improvements and compensation practices are likely to be harder to make and take longer than anyone would like. one slice will not fit all. however well crafted a supervisory principles can play an important role in moving practices in the right direction. i appreciate committee's interest in this important topic and am happy to answer any questions you may have. >> finally on behalf of the sec, mr. breheney. >> good morning mr. frank, mr. bachus and other members. i am pleased to testify on behalf of the securities exchange commission so i may share our thoughts on the topic of executive compensation. as an initial matter it's important to note as the landscape of compensation practices continues to change the commission is committed to keeping disclosure rules we administer up-to-date so investors have the information
they need to make informed investment in voting decisions. as we all know in recent years to issue a fixed compensation has started sicced at the cannes public attention as revelations about executive compensation come to light claims have been made bonuses and severance packages at companies have been exorbitant. indeed expected of compensation has been a lightning rod amplified by the recent financial crisis with concerns about accountability and responsiveness of some boards of directors to the interest of the shareholders. we believe in order for the public markets to function properly it is crucial shareholders, the owners of the company be able to make informed decisions about their investments and shareholders can hold the members of the board of directors accountable for their decisions. notwithstanding the current rules we've revised is an ongoing vigorous debate between those that believe there should be more substantive restraints on pay and those who believe the federal government should never or really set papery matters. it's important to note however the state is significantly more
meaningful as a result of the disclosure rules. however the challenge the commission has always faced and promulgating administering executive compensation disclosure rules is compensation practices on all static. as a consequence the commission has revised the rules as necessary to keep the pace with new developments in compensation practices. most recently in 2006 the commission adopted comprehensive package of amendments to its rules intended to significantly improve the existing regime of executive director compensation disclosure. one of the adoption in the 2006 revision significantly expanded the extent and strengthened the caliber of compensation disclosure the commission is once again considering further possible enhancements. it has been suggested some company's executive compensation has become disconnected from long-term company performance because the interest of management in the form of incentive compensation arrangements in the interest of
shareholders are not sufficiently aligned. critics have complained in some cases the incentive structure created by executive compensation may have to of a management to make decisions that said that complete and inappropriately increase company risk without commensurate risk management compensation should the decision prove costly to the company. indeed, one of the major country in factor site as basis for the current market turmoil is misalignment at a number of large financial institutions of management's financial and tryst with those of shareholders. compensation policies and incentive arrangements represent one of the issues the commission plans to take up next month when it considers a broad package of proxy disclosure enhancements. many of these enhancements are designed to provide shareholders with additional information about the company's key policies, procedures and practices for example, the commission plans to consider whether greater disclosure is needed about how a company and company's board in particular manages risk in putting within the context of a existing
compensation plans and setting compensation levels. the commission also plans to consider whether greater disclosure is needed about overall compensation approach in particular as it relates to the risk management and risk-taking beyond decisions with respect only to the highest paid executive officers. the commission for the plans to consider proposing new disclosure requirements regarding compensation consultant conflicts of interest and in addition to these executive compensation disclosure enhancements the commission plans to consider proposals related to the directors themselves. for example it plans to consider whether to enhance disclosure of director nominee experience qualifications and skills so that shareholders can make more informed voting decisions. the commission further plans to consider proposed disclosures to shareholders about why the board has chosen its particular structure such as whether the structure includes independent share or provides both ceo and the chair in one position. again so they can better evaluate the board when making a