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PROTECTING INVESTORS AND

FOSTERING EFFICIENT MARKETS:

A REVIEW OF THE SEC AGENDA

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 25, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–97

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

May 25, 2006 ..................................................................................................... 1

Appendix: 

May 25, 2006 ..................................................................................................... 59

WITNESSES 

THURSDAY, MAY 25, 2006

Cook, Frederic W., Founding Director, Frederic W. Cook & Co., Inc. ................. 44

Lehner, Thomas J., Director of Public Policy, Business Roundtable ................... 9

Minow, Nell, Editor in Chief, The Corporate Library .......................................... 6

Rees, Brandon J., Assistant Director, Office of Investment, AFL–CIO .............. 40

Wood, Christianna, Senior Investment Officer, Global Public Equity, on behalf 

of the California Public Employees’ Retirement System .................................. 42

Yerger, Ann, Executive Director, Council of Institutional Investors ................... 7

APPENDIX 

Prepared statements: 

Baker, Hon. Richard H. ................................................................................... 60

Moore, Hon. Gwen ............................................................................................ 64

Cook, Frederic W. ............................................................................................. 66

Lehner, Thomas J. ............................................................................................ 74

Minow, Nell ....................................................................................................... 97

Rees, Brandon J. ............................................................................................... 100

Wood, Christianna ............................................................................................ 105

Yerger, Ann ....................................................................................................... 111

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Moody’s Investors Service study ..................................................................... 121

(1)

PROTECTING INVESTORS AND 

FOSTERING EFFICIENT MARKETS: 

A REVIEW OF THE SEC AGENDA 

Thursday, May 25, 2006

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 1:05 p.m., in room 

2128, Rayburn House Office Building, Hon. Richard H. Baker presiding. 

Present: Representatives Baker, Paul, Hensarling, Pearce, Price, 

McHenry, Campbell, Rank, Kanjorski, Sanders, Velazquez, Watt, 

Ackerman, Hooley, Sherman, Lee, Moore, Hinojosa, Clay, McCarthy, Baca, Miller, Scott, Davis of Alabama, Green, Cleaver, 

Wasserman-Schultz, and Moore. 

Mr. BAKER. [presiding] This meeting of the Committee on Financial Services will come to order. By prior agreement, Ranking Member Frank and I have agreed to limit opening statements to two to 

a side, and we will proceed with that unanimous consent agreement. 

Today we meet under the title of, ‘‘Protecting Investors and Fostering Efficient Markets,’’ actually a second day of hearings on the 

subject. Investor protection and fostering efficient market function 

are concepts that are not mutually exclusive, and can be both similarly attained. 

This Congress has a history of acting when identifying irregularities in the financial marketplace, whether it be the accounting 

matter, investment banking and analysts, Fannie Mae, all of the 

matters that have come before the Committee, we have found reason to act, and I believe in most cases, act appropriately. 

I wish to bring to the discussion today a new area of concern, because of its impact on our global competitiveness. Although I know 

some of the witnesses will speak to the concerns relating to executive compensation today, I wish to bring to the debate a discussion 

of the recent Department of Justice action relative to Milberg 

Weiss and class action litigation. 

The discoveries made in this indictment are, indeed, very trou- bling, enabling in excess of $11 million to be paid for basically 

straw men to file suit on behalf of an identified class. The fees generated from those actions exceeded $216 million to the affected attorneys. The attorney general bringing the case is quoted as saying, 

‘‘This case is about protecting the integrity of our justice system, 

2

and class action attorneys and named plaintiffs occupy positions of 

trust in which they assume responsibility to tell the truth.’’ 

According to industry studies, the Milberg Weiss firm has been 

the lead, or co-counsel, in approximately 43 percent of class action 

suits from 1995 to 2005. And that chart is impossible to read, but 

trust me, that’s what it says. The indictment confirms that this 

firm alone was responsible for about $6.5 billion in settlements, 

and raked in $1.7 billion more in fees and expenses. 

The indictment is troubling, but it brings to the clear forefront 

that our tort system is in need of significant reform. Our system 

is increasingly becoming a tool to be manipulated to generate huge 

cash settlements. Even a quick look at recent trends; the aggregate 

securities class action settlements skyrocketed from $500 million in 

1997 to over $9 billion in 2005, which the chart reflects. 

To put it in even more perspective, in 2004, the aggregate fees earned by attorneys was approximately $40 billion. The same year 

aggregate salaries, which is the subject of some discussion today, 

for the Fortune 500 in its entirety, was $5 billion. 

In 2005, the average salary for a Forbes CEO had climbed to $10.9 million. The staggering consequence of the tobacco settlement 

in Florida resulted in any attorney who had anything to do with 

the litigation receiving $233 million. And that’s not per firm, that’s 

per participating attorney in the settlement. 

Ultimately, this money is paid by the corporation, which dilutes 

shareholder rate of return, and it is of consequence in our ability 

to compete globally. Firms are choosing to list overseas, and the 

amount of IPO’s continues to flow out of the country to particularly 

the London market. 

Consequently, Congressman McHenry and I will be introducing 

legislation later in the week to bring about some reform to this 

abusive practice, principally in the context of a loser pays recommendation. 

I think we should examine compensation at all levels. We should 

appropriately rebalance equities from time to time. I think the 

hearing today will bring needed attention to these matters, and I 

look forward to all members’ statements on this matter. Congressman Frank? 

Mr. FRANK. Thank you, Mr. Chairman. And I would ask that all 

members be allowed to introduce their statements into the record 

today. 

Mr. BAKER. Without objection. 

Mr. FRANK. This hearing was called, this second day of hearings, 

pursuant to rule 11 of the Rules of the House of Representatives, 

whereby a majority of the minority can insist on a second day of 

hearings with the witnesses to be called by the minority. We had 

asked that this be done in the regular order, we were denied, and 

every member on the minority side signed a letter, the result of 

which is this hearing. 

It is the second day, technically, of hearings with the SEC, and 

the SEC, as people know, to the credit of Chairman Cox and his 

colleagues, has begun to move in the area of executive compensation. And those who have argued that there should be no government interference with the setting of compensation, have a quarrel 

with Chairman Cox and his colleagues if they act on the proposal 

3

that they have put forward, because they are the ones who have 

initiated this action. 

We agree with what they have done, as far as it goes, many of 

us on our side, and some on the other side. But there is an added 

element. The bill that I have introduced, and that we will be talking about today, is transparency of the sort that the SEC has asked 

for, with a few more specifics. But most importantly, giving the 

shareholders a right to vote. 

We are not talking about having the Congress, the SEC, or anybody else set any amount of money. If the stockholders of General 

Electric want to buy Mr. Welch’s newspapers in perpetuity, they 

can do that. It’s their money, if they are selling newspapers being 

published in 15 years. 

But we do think that they ought to vote on that. The problem 

we have is this; shareholders do not get to vote on the compensation. And indeed, people have said, ‘‘Well, if they don’t like it, they 

can get rid of the board of directors.’’ No, they can’t in many cases, 

because the board of directors have, in many cases, a very undemocratic form of election. I have heard it suggested that, ‘‘Well, you 

know, if they don’t like it, they can sell their stock.’’ I guess I have 

said to the people who have said that, ‘‘That’s right. If you don’t 

like this, you can move to Canada.’’ 

But the fact is that presenting shareholders with the option of 

either sell your stock or take whatever we do, hardly comports with 

the notion of shareholder democracy. And we do have a serious 

problem. The great majority of people who run corporations are 

honest, decent, hard-working people. But the great majority of 

Americans do not steal, murder, or commit arson. We still have 

laws against theft, murder, and arson. The fact that the great majority are well-behaved has never been a good argument against 

dealing with abuses. 

And in fact, under this law’s mechanism that we are talking 

about, we would only deal with abuses. Stockholders of a company 

that is being very well run and whose CEO’s and others are being 

fairly compensated, will routinely vote to ratify it. We don’t have 

an example of excessive stockholder interference with what they 

shouldn’t be doing. 

But there have clearly been abuses. Now, we have one—and I 

want to make the point, too, that what we are talking about here 

is macro-economically significant. A study at Harvard shows that 

in the period from 2003 to 2005, the amount of profits from corporations that went to the compensation for the top five officials 

was 9.8 percent. He had an earlier calculation of 10.3—I want to 

be accurate—we crossed out 10.3; it’s 9.8 percent. 9.8 percent of 

profits is pretty significant. 

And we are talking here about problems that this can cause. In 

Business Week for this week, it notes that Exxon Mobil has the 

largest unfunded pension obligation in America. And Lee Raymond 

has the largest compensation. The $40 million Mr. Raymond got 

would have made a dent, at least, in the unfunded obligation. The 

fact is that we have problems where pensions are underfunded, 

where health care is being cut back, where wages for working people are frozen, and yet we have some CEO’s getting enormous 

amounts of money. 

4

And one of the problems we have is this. No study I have seen—

and we have looked very hard—shows any correlation between 

CEO compensation and any conceivable metric of corporate success. 

There are some aggregate figures—this isn’t an aggregate bill—

we’re not asking all stockholders to vote on the total amount of 

compensation, we’re doing it company by company. 

What we also have—and I would ask that this be put in the 

record—from Moody’s Investor Service July 2005, a study in which 

they say large positive unexplained bonus and option awards are 

predictive of both default and large rating downgrades. We have 

the problem of incentives that have operated as perverse incentives. 

I think what has been uncovered about Fannie Mae is disgraceful. But it is, unfortunately, not the only example in America of 

ambiguity in accounting, combined with various forms of incentives, leading to abusive practices. 

So, all we are saying is this; for the great bulk of corporations, 

where people think everything is fine, this wouldn’t be a factor. But 

in many, many cases we have seen abuses. 

We have also seen, in my judgment, excessive incentive for people to merge and sell. When a corporation is sold to another corporation, and hundreds of thousands of people are laid off in consequence, and the seller, the CEO who sold, gets $100 million, $150 

million, that’s not the way it ought to work. 

So, that’s what this legislation is about. This hearing, as I said, 

was called at the request of the minority to deal with that, and I 

look forward to hearing from the witnesses. 

Mr. BAKER. I thank the gentleman. By prior agreement, we were 

to have two statements on each side. I have no further statements 

on my side, so we go to Mr. Scott at this time for recognition. Mr. 

Scott? 

Mr. SCOTT. Yes, sir. Thank you very much. And I want to commend my colleague, Congressman Barney Frank, for taking leadership on this. 

Let me say at the outset that you find no greater capitalist than 

David Scott. I was trained at the citadel of capitalists, in the Warren School of Finance, so I am 100 percent for profit and moving 

of our free markets and our system. 

And you know, my relationship with investing and the stock 

market goes back to the sixth grade. As our project, we went down, 

and I was in the sixth grade at Fox Meadow in Scarsdale, New 

York. Our project was to go down to the stock exchange and buy 

stock. I know the importance of it, and I know the importance of 

the market. It is the cornerstone of our capitalist system and our 

free enterprise system. 

But we’ve got a problem here. And that problem is the—America’s confidence in our markets, in our economic system, where 

we’re going. And I submit to you that when we have consumers 

who are going out here, paying out the nose for gas at $3.25 a gallon, and then they look and read about Lee Raymond, who is making an exorbitant amount of money, in his compensation packages. 

And when that comes out to the amount that the New York Times 

has said that Lee Raymond made in one day in his compensation 

package, $144,873 a day, that’s not profit. That’s greed. 

5

That is why we are having this hearing here today. That’s why 

this is important. It’s important to look at this from a significant 

balance. We’re not after putting any limit on how much anybody 

can make. But it is important for the sanctity of the markets, for 

the protection of our investors and our consumers, that we give 

some transparency. 

There is nothing wrong with presenting a way for—the legitimate owners of the business, the bosses of the business, should 

know how their managers of their businesses are arriving at their 

compensation package. And beyond that, there are earnings manipulations and unprofitable mergers and acquisitions. 

There are things going on in corporate America that put tremendous pressure on CEO’s to, unintentionally sometimes, just out of 

their own normal behavior, when you have the CEO’s concerned 

with the profit margins and how they arrive at it, they are also 

concerned and determined how they get their compensation package, we have nobody else looking at it, then we find these kinds 

of examples like Lee Raymond and others. 

We are not saying corporate America does not have anything to 

worry or to fear about what we’re doing. But anybody with any 

stretch of common sense would know that what is happening in 

terms of the compensation packages of CEO’s is alarming. 

Let me just share this one very vital statistic that comes from 

the corporate library’s recent CEO pay survey. It said that the median total compensation received by CEO’s increased 30 percent in 

Fiscal Year 2004, with the average increasing 91 percent, driven by 

27 CEO’s receiving compensation over 1,000 percent greater than 

what they got the previous year. A 1,000 percent—10 times 100 

percent increase in 1 year. That’s outrageous. It goes on to say that 

the 2004 increase comes on top of median increases of 15 percent 

of the fiscal year. 

Now, here is the other point, which is very dangerous, for where 

we’re headed, because the middle class is getting squeezed in so 

many ways, almost out of existence. This disparity has grown significantly over the last few years. In 1991, the average large company CEO received approximately 140 times the pay of an average 

worker in his company. And then, just 12 years later, in 2003 that 

ratio jumped to 500 times as much as their average employee is 

making. 

Mr. BAKER. Can you begin to wrap up for me, Mr.— 

Mr. SCOTT. I will. 

Mr. BAKER. Thank you. 

Mr. SCOTT. So, I wanted to make sure everybody understood that 

there is great need for us to respond and come, and I think corporate America will be most appreciative of us taking a very good 

sobering look at this situation. It’s out of balance, and we want to 

bring some balance and transparency to it. Thank you, Mr. Chairman. 

Mr. BAKER. I thank the gentleman. It is now time to turn to our 

distinguished panel that we have been able to secure for today’s 

hearing. And— 

Mr. FRANK. Mr. Chairman, could I just—I appreciate what we 

have done, and you know, we want to have a balanced hearing. It 

was under the rules, the minority’s right to invite. 

6

I would note that several people couldn’t come. We did invite 

Professor Bebchuk, but he was out of the country. We invited Lynn 

Turner, formerly of the SEC, and he was unable to come. We invited the U.S. Chamber of Commerce, but they declined to send 

anyone. We appreciate the Business Roundtable being here. And 

we also invited Mr. Phil Purcell, Mr. James Kilt, and Mr. Lee Raymond. And for reasons I don’t understand, they weren’t able to 

come. Maybe that’s just as well, because we would not have been 

able to afford their hourly rate. 

Mr. BAKER. I think it was a travel budget issue. 

Mr. FRANK. Well, we couldn’t afford the hourly rate, but people 

do testify here for nothing. But we did invite some people who we 

thought would take the—and we do have, I think, a balance here, 

in terms of the witnesses. Thank you. 

Mr. BAKER. I thank the gentleman. At this time, I would like 

to—well, our customary practice is that your formal statement will 

be made part of the record. We request that your comments be limited to 5 minutes, to enable members to ask as many questions as 

possible. And we do appreciate your courtesy in participating. 

Our first witness is Ms. Nell Minow, editor in chief of the Corporate Library. Please proceed as you like. 

STATEMENT OF NELL MINOW, EDITOR IN CHIEF, THE 

CORPORATE LIBRARY 

Ms. MINOW. Thank you very much, Mr. Chairman. And thank 

you all for your opening comments, which I think set the agenda 

beautifully. 

I wanted to associate myself, Mr. Chairman, with your concerns 

about the class action abuses, and welcome any proposals that you 

have for making legitimate shareholders the controllers of the process, rather than the trumped up plaintiffs. 

Mr. Scott, I particularly want to thank you for citing our report, 

the Corporate Library’s report. And I have several family members 

who went to the Fox Meadow School, so I know you got a fine education there. And I appreciate your comments, and Mr. Frank’s as 

well. 

You know, Marie Antoinette would be embarrassed at some of 

these numbers, perhaps, United Health Group—$1.6 billion with 

an additional $1 million being granted to the CEO. And yet, somehow the CEO’s of America are embarrassment-proof. 

I agree that most people in most corporations and most boards 

of directors are honorable, decent people, but Warren Buffet said 

that even he has been embarrassed into approving excessive compensation packages. And if Warren Buffet cannot exercise control 

in the boardroom, then I think we do definitely have a problem. 

Back in the 1950’s, John Kenneth Galbraith said, ‘‘The salary of 

the chief executive of the large corporation is not a market award 

for achievement. It is frequently in the nature of a warm, personal 

gesture by the individual to himself.’’ 

If you look at the people in the top stratosphere of pay, it’s a 

very, very small group at the top of the pyramid. You’ve got rock 

stars, movie stars, athletes, investment bankers, and CEO’s. The 

other four are the ultimate pay-for-performance people. You can 

look in the paper every Monday and it will say, ‘‘Reese 

7

Witherspoon’s last movie made this amount over the weekend, her 

asking price for the next movie has gone up to $20 million,’’ or it 

can go down. You can look at John Travolta’s salary over the years; 

it has gone up and down, very much in accord with the box office 

returns. The same thing goes for athletes, as well as investment 

bankers. They could be waiting tables in a week, if a deal fell 

apart. 

The only exception to that rule, the only exception where pay and 

performance are not linked, is with CEO’s. Why is that? Because 

CEO’s pick the people who set their salary. If I wanted to pick the 

people who set my salary, I could put my mom and dad on the 

board, and believe me, my pay would go up. That is not a good system. 

The problem is that we’ve got significant impediments to the 

market working here. Like, Mr. Scott, I am proud to call myself a 

capitalist. I went to the University of Chicago, which is just as 

committed to capitalism as the Wharton School, and I like to see 

the market working. Right now, the consumers of CEO pay are the 

shareholders, and they do not get a chance to send the market that 

all-important response. 

The two key points that I want to make about CEO pay are 

these. The first one is that executive compensation has to be looked 

at like any other allocation of corporate assets. What is the return 

on investment for CEO pay? The answer, if you look at Rakesh 

Khurana’s outstanding book, ‘‘In Search of a Corporate Savior,’’ is 

that we are competitive perhaps with a piggy bank, in terms of the 

return on investment that we get from CEO pay. We must be able 

to subject that to that same market test that we do for any other 

allocation of corporate resources. 

And the second point I want to make is that this truly, truly undermines the legitimacy of our capitalist system here. It is such an 

offense, that I think that the abuses of CEO pay are as much a reason for the offshore relocation of listed companies and IPO’s as any 

other problem that you might name. 

I would like to reserve the rest of my time to answer questions, 

and I appreciate very much the opportunity to be here. 

[The prepared statement of Ms. Minow can be found on page 97 

of the appendix.] 

Mr. BAKER. Thank you for your testimony. Our next witness is 

Ms. Ann Yerger, executive director, Council of Institutional Investors. 

Welcome. 

STATEMENT OF ANN YERGER, EXECUTIVE DIRECTOR, 

COUNCIL OF INSTITUTIONAL INVESTORS 

Ms. YERGER. Thank you very much. Good afternoon. The Council 

is an association of more than 300 investment organizations, including more than 130 public, corporate, and union employee benefit plans, with more than $3 trillion in assets. Council members 

are the ultimate capitalists. They have a very significant and longterm stake in the U.S. capital markets. The average council fund 

puts about 45 percent of its portfolio in U.S. publicly-traded stocks, 

and about 30 percent in bonds, U.S. bonds. On average, about half 

of their U.S. equity portfolios are passively managed. 

8

As long-term investors, our members have a vested interest in 

ensuring that U.S. companies attract, retain, and motivate the 

highest performing employees and executives. We, therefore, support compensating executives well for superior, long-term performance. 

However, headlines in recent years have highlighted a host of executive pay abuses and excesses at U.S. companies. Most recently, 

press accounts have identified how executives at a small but growing list of companies have benefitted by back-dating stock option 

grants to take advantage of stock-price lows, to the disadvantage 

of shareowners. 

Council members and other investors are harmed when poorly 

structured executive pay packages waste shareowners’ money, excessively dilute their ownership interest, and create inappropriate 

incentives that may reward poor performance, or even damage a 

company’s long-term performance. 

Inappropriate, or ill-designed pay packages may also suggest a 

failure in the board room, since it is the job of the board of directors, and more specifically, the compensation committee, to ensure 

that executive pay programs are effective, reasonable, and rational, 

with respect to critical factors, such as company performance and 

industry considerations. 

The Council has long believed that executive pay issues are best 

addressed: one, by requiring companies to provide full, plain 

English disclosure of key quantitative and qualitative elements of 

executive pay; two, by ensuring that corporate boards are held accountable for their executive pay decisions; three, by giving 

shareowners meaningful oversight of executive pay; and four, by requiring disgorgement of ill-gotten gains pocketed by executives. 

In general, the Council believes that regulatory bodies are best 

positioned to address shortfalls or problems with these checks and 

balances, and we are very hopeful that the SEC’s current initiatives will address the important disclosures raised by Representative Frank in H.R. 4291. 

Of note, we are currently studying the issue of shareowner approval of overall executive compensation programs, to determine 

whether and how to best require such an approach in the United 

States. And as a result, the Council has no current position on this 

particular provision of the bill. The Council does consider such approval a best practice. 

Good disclosure is the foundation of these checks and balances. 

The Council believes that disclosure should include qualitative and 

quantitative information about all elements of executive pay, including details descriptions and estimates of the value of stockbased pay, retirement benefits, and severance agreements. 

The Council, therefore, is very pleased to support the SEC’s proposal to improve the executive pay disclosure rules. The Council believes the proposal will result in clearer and more complete quantitative and narrative disclosures of pay. 

The SEC proposal, however, falls short in some respects, including the failure to require companies to disclose key quantitative information about performance targets and thresholds, if such disclosure might be competitively harmful. The Council believes this approach provides far too large an exemption. The Council strongly 

9

encourages the SEC to give consideration to including in the final 

rule the important disclosures contained in H.R. 4291. 

The provisions requiring disclosure of short- and long-term performance measures used by companies in determining the pay of 

executives, and whether or not these measures were met during 

the preceding year, are essential to investors and the marketplace 

at large, in assessing performance-based executive pay. These disclosures are also consistent with the executive pay disclosures recommended in the Council’s corporate governance policies. 

The Council looks forward to working closely with the SEC, this 

committee, and other interested parties, to ensure that investors in 

the capital markets are provided with the types of disclosures and 

other tools necessarily to properly evaluate the performance of company compensation committees, to assess pay for performance 

links, and to optimize the shareowner’s role in overseeing executive 

pay and holding directors accountable. Thank you. 

[The prepared statement of Ms. Yerger can be found on page 111 

of the appendix.] 

Mr. BAKER. Thank you for your testimony. Our next witness is 

Mr. Thomas J. Lehner, director of public policy, Business Roundtable. 

Welcome, sir. 

STATEMENT OF THOMAS J. LEHNER, DIRECTOR OF PUBLIC 

POLICY, BUSINESS ROUNDTABLE 

Mr. LEHNER. Thank you, Mr. Chairman, Congressman Frank, 

and members of the committee. Business Roundtable, as you know, 

is an association of chief executive officers of leading U.S. companies with over $4.5 trillion in annual revenues, and more than 10 

million employees. 

Our companies comprise nearly a third of the total value of the 

U.S. stock market, and represent nearly a third of all corporate income taxes paid to the Federal Government. Collectively, they returned over $110 billion in dividends to shareholders in the economy in 2005. 

We have long been leaders in the area of corporate governance. 

We supported the Sarbanes-Oxley reforms in 2002, because we 

knew investor trust and confidence had to be restored to the marketplace. That same year, we also published our principles of corporate governance, and the following year we established the Institute for Corporate Ethics at the University of Virginia. And in 

2003, we published, ‘‘Executive Compensation Principles and Commentary.’’ 

And in those principles on executive compensation, we called for 

executive compensation to be closely aligned with the long-term interest of shareholders, and to include significant performance-based 

criteria. Furthermore, board compensation committees should be 

composed of entirely independent directors, and they should require executives to build and maintain significant equity investment in the corporation. 

Finally, companies should provide complete, understandable, and 

timely disclosure of compensation packages, and the SEC proposal, 

which we support, is consistent with our principles. 

10

In the current debate on executive compensation, a key question 

is how do you define performance? We believe there has been too 

much emphasis on short-term stock gain, and not enough recognition of other performance-based criteria. It is our belief that determining these criteria and setting overall compensation should properly remain a function of the board of directors and the compensation committee, as they are in the best position to set the standards 

and evaluate the performance of executives. 

Concerning the recent coverage of CEO compensation, there has 

been a great deal of misleading information promoted by critics and 

reported in the media. There are over 15,000 publicly traded companies here in the United States. And if one believed even a few 

of the stories written, you would think all CEO’s make tens, if not 

hundreds of millions of dollars each and every year. This is simply 

not the case, and we believe that this type of sensationalism is 

damaging to the debate, our corporations, and our shareholders. 

This is not the first time that the issue of CEO compensation has 

attracted so much attention. In the early 1980’s, when stocks were 

underperforming, reformers sought to limit the salaries of CEO’s 

and tie their pay to the performance of the company. Congress 

obliged by placing tax consequences on annual salaries above $1 

million, and CEO’s were given stock options as incentives to perform. 

As the market has increased dramatically in the last 15 years, 

so has CEO pay. Reformers got the system they wanted, but now 

ironically, many are critical of the results, and they claim that the 

CEO pay exceeds company performance. 

In fact, research that we commissioned does not support this. 

The Mercer 350 database shows that over a 10-year period from 

1995 to 2005, median total compensation for CEO’s has increased 

9.6 percent, while the market cap has increased 8.8 percent and 

total shareholder return has increased 12.7 percent. 

This trend was confirmed in an article last week in the New 

York Times, that cited an NYU/MIT study showing a direct correlation between CEO compensation and the value of the top 500 companies between 1980 and 2003. I have attached that article to my 

testimony. 

We have identified two flaws that contribute to the erroneous figures that inflame the debate. First, many of the statistics cited are 

averages, and not medians. And as we all know, these could be 

misleading, because the outlier skews the average for everyone. 

The second involves how stock options are counted. When options 

are exercised, they often represent a decade or mores worth of accumulated stock. And in the current debate, they are characterized 

as single annual amounts of compensation. 

We all agree that shareholders provide the capital and, in effect, 

own companies. But the key distinction is recognizing that shareholders don’t run companies; shareholders invest in companies. 

They profit from their growth. And in exchange for not having any 

liability for company actions, decisionmaking is necessarily left to 

boards and CEO’s. 

The U.S. corporate model has been the envy of the world. And 

in our view, legislative proposals calling for shareholder approval 

of compensation plans is unwise, and ultimately unworkable. If we 

11

adopted a system where a small group of activist shareholders use 

the process to politicize corporate decisionmaking, the consequences 

could very well be destabilizing. 

Some activist groups who disagree with corporate positions on social security reform, health care reform, and free trade policies, just 

as an example, seek to super-democratize corporations to the point 

of having shareholders remove directors, choose CEO’s, and determine company policies and levels of pay. This is a slippery slope 

that we think should be avoided. 

If this model were applied to CEO’s, then by extension, the investing public would have a hand in determining salaries for news 

anchors, movie stars, and athletes. 

Boards are not willing to pay a CEO more than they are worth, 

or more than the market price will bear. The performance metrics 

applied are not limited to just stock price. They also include annual 

profits, job creation, restructuring plans, remaining competitive in 

the global marketplace, and subjective factors such as company and 

community activities, crisis response efforts, and leadership. 

One telling statistic about CEO accountability comes from our 

own members. In 1985, the average CEO tenure was over 8 years. 

Today’s it’s four-and-a-half. Many CEO’s hired today are expected 

to produce in a short period of time. And while they are well-paid 

if they succeed, they are replaced if they fail. The Washington Post, 

also last week, cited a Booz Allen study that showed CEO turnover 

in 2005 was above 15 percent, the highest level in a decade. 

We cannot state what the appropriate level of CEO pay should 

be, nor can we answer the question how much is enough. That 

would require broader social debate on wealth in our society. But 

within the context of corporate governance, setting CEO pay is a 

function of the board of directors, and should remain that way. 

We do not believe in encouraging an environment where companies become gridlocked while executives pander to numerous shareholder constituencies. It is important to remember that these are 

private corporations designed to make a profit, and public investment in them is voluntary. We should not confuse the term ‘‘public 

companies’’ with the public sector. 

The key to this process is to give investors the information they 

need to make informed decisions to buy, hold, or sell their investments. This is the rationale behind the SEC initiative on compensation disclosures, and this is one of the reasons why we support it. 

In conclusion, we are sensitive to extreme cases of CEO compensation reported in the media, and we continue to develop and 

promote best practices for our members to follow. Independent 

boards and shareholders will deal with extreme cases, and we 

strongly believe that the current system has worked well and 

should not be changed by any historical measure. Shareholders 

have enjoyed enormous returns by investing in the marketplace, 

and that is the ultimate incentive for boards and CEO’s to perform 

well. 

Thank you. 

[The prepared statement of Mr. Lehner can be found on page 74 

of the appendix.] 

12

Mr. BAKER. Thank you, sir, for your testimony. And may I start 

with verifying what I think I heard you indicate, relative to a data 

set from 1995 to 2005, a study of executive compensation as cast 

against the market cap of the individual company, and as cast 

against the rate of return to shareholders? 

Mr. LEHNER. Correct. 

Mr. BAKER. And those numbers were a 9.6 percent increase over 

that period for CEO’s— 

Mr. LEHNER. An increase for CEO’s of the 350 companies in the 

Mercer database, the large 350, 9.6— 

Mr. BAKER. So those 350 represent Fortune 500’s, basically, or— 

Mr. LEHNER. Yes. 

Mr. BAKER. And then the company also experienced about an 8.8 

percent net increase in market cap. And the— 

Mr. LEHNER. Right. 

Mr. BAKER.—shareholders rate of return was 12.7 percent. 

Mr. LEHNER. Over a 10-year period. 

Mr. BAKER. Okay. 

Mr. LEHNER. That’s right. 

Mr. BAKER. I think I have another one of my delightful charts 

which demonstrates over a sort of similar period, my concerns 

about this class action litigation business, and the cost of doing 

business. 

We’ve really got two. We’ve got one that shows the domestic effect—mine is 1990 through 2004—and then the—concurrently, the 

comparable in the European environment, where we have our competitors, we are the column on the far right, as a percent of GDP. 

And France, for goodness sake, is, you know, less than half of our 

litigation cost. I am really concerned. 

I believe one of the witnesses indicated that compensation to 

CEO’s was becoming a factor in whether you function domestically 

or in a foreign market. If that is true, then I can’t see how this effect is not of equal concern in the scope of business decisionmaking. 

Mr. Lehner, your data, I think, goes to a median calculation. 

During that period, was there any time in which compensation 

went down, from year to year, or was it always an increase in your 

analysis? 

Mr. LEHNER. I know that in the last year we’ve looked at it, it’s 

gone down 1 percent, I think. 

Mr. BAKER. So there are market factors that cause these reimbursement rates to go up and down, depending on business cycles? 

Mr. LEHNER. That’s correct. I mean, a lot of these things tend to 

be cyclical. And again, I know we all talk from a different set of 

facts up here, but you know, again, I want to demonstrate that 

we’re sensitive to the issue. This is one corporate governance issue 

that drives all others. And— 

Mr. BAKER. Do you support the current proposal of the SEC, relative to disclosure? 

Mr. LEHNER. Absolutely. I mean, we have made a couple of suggestions to them about ways that we thought it could actually be 

improved. But as I said in my testimony, we think that the best 

thing to do here is to arm investors with as much information as 

possible. And we think that Chairman Cox, in their proposal, goes 

a long way toward doing that. 

13

Mr. BAKER. Thank you. Ms. Minow, I want to engage you in a 

different subject, and make quite clear that my comment has no reflection on the Corporate Library’s role or function. 

But I believe I have read comments attributed to you, relative to 

firms that are now involved in corporate governance, proxy voting, 

consulting services, where a rating can be given to a corporation 

based on those elements. And let’s assume you get a 2 out of 10. 

Then that company can turn around and hire that firm that just 

did the rating to consult and tell you how to get it up to an eight. 

And amazingly, after you pay the consulting fee, you get the eight. 

And I think the quote that I read, which I very much like was, 

‘‘You cannot be an umpire and a pitcher in the same game.’’ 

Ms. MINOW. Yes, sir. 

Mr. BAKER. If that, in fact, is your remark, can you help me understand better how we can cure that particular market aberration? 

Ms. MINOW. Yes, Mr. Chairman, that is my remark, and I do feel 

very strongly about that. And of course, my firm does not do any 

consulting with companies. And I believe that is exactly the kind 

of issue that is best resolved by the market. People know exactly 

what those ratings are worth, if they know that they can be 

changed as a result of consulting arrangements. 

Mr. BAKER. But shouldn’t there perhaps be some requirement for 

disclosure of that relationship? 

Ms. MINOW. No question about it. And I believe that the company involved does disclose those relationships. And in fact, I know 

for a fact that they do. 

Mr. BAKER. But the rating agency itself does not necessarily disclose that they are rating and consulting? 

Ms. MINOW. Yes, they do. 

Mr. BAKER. Oh, good. 

Ms. MINOW. Yes, they do. And so, I believe that the market gives 

the appropriate weight to the rating, understanding that they do 

also have the consulting relationships. 

And as I said, my firm does not do that, and will never do that. 

Mr. BAKER. Terrific. Ms. Yerger, my time is about to expire, but 

you made reference to the pending SEC proposal, and you do believe that it is advisable, and you had some further comment about 

other additional elements that might be included. 

Would it not be appropriate for the SEC to move forward with 

the pending matter, implement it, and see what reaction we may 

get in market function as a result of it, before proceeding further? 

Ms. YERGER. Well, we absolutely are very supportive of the SEC 

proposal, and we do want it to move forward, but we think it’s important that the rule that is adopted and put in place is of high 

quality and has the important disclosures that we think that are 

necessary for the investors, to understand what is going on and to 

do—to perform their role, in terms of overseeing executive pay. 

And we think there are—by and large, we are completely supportive of the SEC proposal. But like the BRT, we think there are 

some elements that could be changed, tweaked, or added to improve that. 

Mr. BAKER. Thank you. My time has expired. Mr. Frank? 

14

Mr. FRANK. Let me first ask—Mr. Lehner gave an exposition of 

how corporations ought to work, and particularly denigrated as an 

effort to ‘‘super-democratize’’ corporate governance by, for instance, 

allowing the stockholders to deselect board members. I believe you 

gave that as one of your examples. I would be interested in Ms. 

Yerger and Ms. Minow’s comments on that model. 

Apparently, the model—and I was surprised by it, to be honest 

with you—the model, you said, that shareholders are allowed to invest, but they shouldn’t get into, really, and of the decisionmaking. 

And I am particularly troubled about the notion that they shouldn’t 

have a great deal of discretion about the boards of directors. Because the alternative is, I think, the current situation, where the 

boards of directors are more self-selecting and picked by the CEO’s, 

and that’s one of the reasons why they’re not a very independent 

check, it seems to me, on salaries. 

But I wonder, first, Ms. Minow and Ms. Yeager, what’s your view 

of the role of shareholders and the governance of corporations? 

Ms. MINOW. Yes, I agree, Mr. Frank. Certainly nobody better 

than the people in this room understand what the word election 

means, and yet we use that term in corporate matters where the 

CEO picks the candidates, no one runs against them, and management counts the votes. So that’s more like an election in North 

Korea than it is in— 

Mr. FRANK. And as I understand it, if you get any votes you win. 

Ms. MINOW. That’s correct. Under State law, which of course is 

governing here, if you get one vote—if you vote for yourself, you 

win, unless someone is running against you. I would be 100 percent 

happy to defer all matters of compensation to the board of directors 

if the shareholders had some way to elect the board of directors, 

or even to get rid of boards of directors that did a very bad job. And 

right now, that is not the case. I am— 

Mr. FRANK. Ms. Yerger, your view on the role—I mean, it seems 

to me, at Business Roundtable Mr. Lehner describes what I would 

think is a very passive role for shareholders. What’s your conception of the view shareholders ought to have in the— 

Ms. YERGER. One of the most basic rights assigned to owners is 

to elect the directors. And right now, there isn’t a meaningful election. 

Mr. FRANK. It’s not. 

Ms. YERGER. And we believe the majority voting for directors is 

one of the most single most important reform, in terms of— 

Mr. FRANK. Well, let me ask you, in the absence of any significant shareholder—what is the major influence in the selection of 

directors? Who—as a practical matter, since the shareholders don’t 

pick the directors, where do the directors come from? 

Ms. YERGER. They come from the board. It’s the nominating committee and the board that works on that. 

Mr. FRANK. They nominate themselves. 

Ms. YERGER. Essentially— 

Mr. FRANK. And what about the role of CEO’s in the selection of 

directors? 

Ms. YERGER. Well, we hope that the CEO is not involved at all. 

Unfortunately— 

Mr. FRANK. Well— 

15

Ms. YERGER.—in some cases— 

Mr. FRANK. I hope I could lose 10 pounds in the next week, but 

I’m not buying any new clothes. I mean, I know what you hope. 

But what’s the reality, in your view? 

Ms. YERGER. I think that, at some companies, it is a CEO-dominated process, and— 

Mr. FRANK. And in the CEO-dominated process of picking the 

board of directors, who sets the CEO’s compensation? 

Ms. YERGER. The individuals the CEO has put on the board. 

Mr. FRANK. Yes, I think that’s the significant problem we have. 

So I—and I know people say, ‘‘Well, if they don’t like it, they can 

sell,’’ and the problem is that it does not seem to me that’s an appropriate choice for people to make. You can be locked in, etc. Mr. 

Lehner, one other question. 

Mr. LEHNER. Sure. 

Mr. FRANK. And that is I cited this Moody’s survey about the incentives. And one of the things that we have in our proposal, I 

don’t think, is fully involved in the SEC, even before you get to 

that super-democratization notion that the shareholders ought to 

be able to vote on the company, radical as that may be. 

But the issue is where incentives are given if certain targets are 

hit, and then the targets, it turned out, were only very temporarily 

hit. And I can see—I’ve said before, accounting for derivatives 

seems to me to range somewhere between alchemy and astrology 

in the degree of intellectual vigor that you can bring to it at this 

point. 

But—and one of the things that we have said is where targets 

were hit, and it turns out that was a very temporary hit, we want 

to know what the corporation does to get it back—not that they 

have to do that, but we want to know the plan. But I have to ask 

the broader question, and that is this whole role of incentives. 

I am getting paid $7 million to run a corporation. Why do I need 

to have incentives to do my job? I don’t know, maybe you get an 

incentive at the Roundtable. I don’t get an incentive. Most people 

don’t get incentives. You’re hired to do a job, you’re an honest person, you’re conscientious, so you do your job. Why do the most 

highly paid people in America, who get very large salaries and 

have very nice working conditions then need to be given bonuses 

to do what they should have been doing in the first place? 

Mr. LEHNER. Sure. Let me make two quick points. One is on the 

question you raised a minute ago on board elections. A number of 

our companies have voluntarily moved to a system of majority voting for directors. 

Mr. FRANK. Do you think that they should all do that? 

Mr. LEHNER. We have encouraged companies to do that, but to 

make that determination on their own. And another— 

Mr. FRANK. Well, if it is a good thing, why does it have to be 

done on their own? If it’s a good thing to do, why shouldn’t there 

be some encouragement to do it? 

Mr. LEHNER. We do not feel that it is necessary to have— 

Mr. FRANK. But what if it was? I understand that, but that is 

not my— 

Mr. LEHNER. Blanket change in State law and a one-size-fits-all 

approach for everyone. 

16

Mr. FRANK. I don’t—there are 50 States, you’re not going to have 

1 State—but if you think it’s a good idea, why shouldn’t we try and 

have people do it? 

Mr. LEHNER. We have encouraged our companies to think it’s appropriate to go ahead and do so. It— 

Mr. FRANK. But if it turns out 5 years from now that many of 

them haven’t done it, do you think we should do something, or 

would you want to keep encouraging them? 

Mr. LEHNER. I would keep encouraging them to make that determination on their— 

Mr. FRANK. All right, hope springs eternal. 

Mr. LEHNER. That’s right. 

Mr. FRANK. Heck of a policy. Go ahead. 

Mr. LEHNER. With respect to incentives, you know, I think we 

are in agreement on this point. As I mentioned in my testimony, 

we think there has been too much emphasis on what we call shorttermism, too much emphasis on short-term manipulation of stock 

gain. It’s not just about the stock price in order to evaluate— 

Mr. FRANK. I mean, what can we do about that? Is there a remedy, other than hope? 

Mr. LEHNER. I think the important thing is that, you know, we 

all work to make sure that boards continue to do their job— 

Mr. FRANK. I don’t— 

Mr. LEHNER.—and we’ve certainly seen, in our own surveys that 

we do every year, a dramatic increase in activity in board— 

Mr. FRANK. I appreciate that, but I have to say that, based on 

experience, I think the road to excess is paved with good intentions. Thank you, Mr. Chairman. 

Mr. LEHNER. We will agree to disagree on that one. 

Mr. BAKER. The gentleman’s time is expired. Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. It certainly is a 

worthy topic that we undertake today. I certainly don’t know what 

the optimal level of executive compensation ought to be. But I am 

very fearful, from hearing some of the comments of my colleagues, 

that we may be going down a path where the cure may be worse 

than the ill. 

Whatever ills there may be in the corporate board rooms, I am 

certainly not sure that I want the executive compensation committee to consist of 435 members of the House and 100 members 

of the Senate. 

Ms. Yerger, I used to—I spent a small bit of time in the investment world prior to coming to Congress. And I recall that any time 

you had somebody representing CalPERS on the other end of the 

line, you paid very careful attention to what they have to say. 

It seems to me that institutional investors still have the opportunity to vote with their feet. And as I review your testimony, I certainly agree with the general thrust and philosophy that greater 

disclosure is certainly important. But explain to me the hurdles 

that prevent the other lead institutional investors from having a 

greater say-so in the marketplace, and saying, ‘‘If this is the way 

you’re going to compensate your executives, we’re getting out, we’re 

bailing out, we’re not going to own 10 percent of your company, and 

we’re going to go invest somewhere else.’’ 

17

Ms. YERGER. The Wall Street Walk really doesn’t work for Council members. I mean, just by virtue of their incredible size, and the 

fact that they have such a significant strategy of passive investing—and that’s broad passive, so I’m not talking about the S&P 

500, but this would be Russell 3,000-plus companies—they really 

simply can’t just pick up and leave, which is why paying attention 

to corporate governance is so important. And that is why we believe full, clear, plain-English disclosure of these issues is so necessary. 

Mr. HENSARLING. And speaking of producing results—and I think 

Chairman Baker alluded to this—on page 4 of your testimony, looking in 10 years—I believe trailing median total compensation for 

CEO’s has increased 9.6 percent, total shareholder return has increased 12.7 percent. For anybody who doesn’t know that, could 

you tell us the components of total shareholder return? 

Mr. LEHNER. Thank you. Yes. And Fred Cook, who is going to be 

on the next panel, is going to talk about this more, but you know, 

total shareholder return represents—certainly, as I understand it—

the compounded amount of annual return that shareholders get 

over that period, when they have invested in the stock markets. 

You put your money in the bank, and you get, you know, 2-, 3-, 4 

percent. 

But if you invested it in the market over that period, you would 

have a compounded return of 12.7 percent. Not a lot, if you invested $500, but if you invested a couple of hundred thousand, it 

might be a fairly significant amount of money. It’s all proportional. 

But the point is that the rate of return tracks with the increases 

in the market cap, and the increases in what we have looked at as 

median CEO pay. 

Mr. HENSARLING. During—I guess you would call it—part one of 

this hearing, which I believe took place last week, we heard testimony from the chairman of the New York Stock Exchange. 

And if I could quote from his testimony, ‘‘The United States is 

losing listings’’—alluding to the New York Stock Exchange —‘‘because of the persistent concern surrounding the U.S. trial bar and 

the litigious environment in the United States. We need to recognize that the United States today has a reputation both at home 

and globally as an increasingly difficult place to do business. The 

possibility of being sued for huge sums or also bearing the high 

cost of legal defense has brought many companies to a moment of 

reckoning that mitigates against registering their securities in the 

United States.’’ Do you agree or disagree with that sentiment? 

Mr. LEHNER. Generally, I agree. I have seen studies that have 

been done. I mean, there are a number of listing entities around 

the world now, and it’s a competitive marketplace. 

And you have people in the London Exchange and in the Asian 

exchanges, and they are going to companies and they are saying, 

you know, ‘‘Come and list with us,’’ the litigation risk is smaller, 

the amount of regulation is less, it’s more attractive to be in these 

emerging markets, and it is no question that it’s a competitive environment. 

Mr. HENSARLING. I see my time has expired. Thank you. 

Mr. BAKER. The gentleman’s time has expired. Mr. Sanders? 

18

Mr. SANDERS. Thank you, Mr. Chairman. Let me begin by applauding Ranking Member Frank for bringing forth this hearing, 

which touches an issue that I think gets nowhere near the kind of 

discussion it should be getting in Congress, or in the media, or in 

the United States of America in general. 

And while today we are looking at legislation dealing with the 

relationship between stockholders and CEO’s and boards of directors, the truth of the matter is that this issue touches on a broader 

issue, and that is the growing gap between the rich and the poor 

in America, and the fact that many would argue that we are now 

moving toward an oligarchy in which fewer and fewer people have 

more and more wealth and more and more power, while people in 

the middle, working people, see their standard of living decline, 

while poverty in America decreases. 

Just in the last 5 years alone, we have seen 5 million more 

Americans slip into poverty. We have seen the wages of millions of 

American workers decline. Many people work longer hours for 

lower wages. And yet, the people on top have never had it so good. 

So, in a sense, what we are talking about today is not just CEO 

compensation, not just stockholder rights, but what kind of Nation 

we are becoming. 

And the fact of the matter is that today, the wealthiest 1 percent 

own more wealth than the bottom 90 percent. The richest 1/100th 

of 1 percent, 13,000 families, earn more income than do the bottom 

20 million American families. And I think when ordinary people in 

rural States like my own, working people have to travel 50 or 100 

miles to work and are now paying $3 for a gallon of gas, read in 

the paper that former CEO’s of companies like Exxon Mobil are 

now—Mr. Raymond—are now receiving $398 million in a retirement package, they are wondering about what goes on in the 

United States of America. 

Now, we hear a lot—and sometimes political campaigns are run 

on moral values. And when we talk about moral values, often it is 

associated with issues like abortion or gay rights, and so forth and 

so on. I want to ask Mr. Lehner a question about moral values. 

Mr. Lehner, do you think it is morally appropriate that CEO’s in 

America today, for large corporations, now earn over 400 times 

what their employees make? Do their needs—do they eat 400 times 

more? Do their kids need 400 times more education? Do they need 

400 times more housing? What is your sense about what it means 

to America, in terms of our moral values, that so few have so much, 

and so many have so little, and that the gap seems to be growing 

wider? 

Mr. LEHNER. Well, I think you raise a good point, and you know, 

I should point out that our CEO’s definitely recognize that they 

have a much greater social and economic responsibility than those 

that came before them. 

I might point out that our companies give more than $7 billion 

a year in charitable contributions, and that represents nearly 60 

percent of total corporate giving. 

Mr. SANDERS. Mr. Lehner, if I may, one of the reasons that people give more in charity is that we have more and more people in 

our country who are losing health insurance. Poverty is increasing, 

directly as a result of many policies made in this Congress by 

19

Members of Congress who receive huge campaign contributions 

from people in the Business Roundtable. 

So, when the Business Roundtable encourages companies to 

throw American workers out on the street, move to China, and poverty increases, then you come in and say, ‘‘Gee, we increase money 

for charitable organizations,’’ some of us are not deeply touched by 

that. 

Mr. LEHNER. Well, my response to that is quite simply that I 

think there is a recognition that there are some who have less than 

others in this society, and I think our members have been very responsive— 

Mr. SANDERS. What is the moral? I asked you a simple question. 

I understand that some of your CEO’s and companies give money 

to charity, and I appreciate that. Morally, in your judgment, is it 

appropriate, is it a good thing that 13,000 families earn as much 

income in America as do the bottom 20 million families? Is it a 

morally good thing? 

Mr. LEHNER. No. 

Mr. SANDERS. Okay, thank you. What would you suggest that we 

do about that? 

Mr. LEHNER. I would suggest that we all work together to, you 

know, lift the tide so all boats can rise. 

Mr. SANDERS. Okay. 

Mr. HENSARLING. Will the gentleman yield? 

Mr. SANDERS. I would love to, but I just don’t have a whole lot 

of time. If you will excuse me, let me ask the other people up there. 

Yes? 

Ms. MINOW. Thank you. This is exactly what I was referring to 

when I said that this is undermining the entire system of capitalism. It takes away the credibility of our system if it is allowed 

to have such an outrageous, such an appalling, such an atrocious 

result. And we are risking losing a system which has created a lot 

of jobs, which has created a lot of goods, and which has created a 

lot of services and a very robust system. 

I worry very much about the beneficiaries of those pension funds 

who are members of the Council, institutional investors. Those are 

the working people whose retirement assets are at risk because of 

this atrocious behavior. 

Mr. SANDERS. Ms. Yerger, would you comment on the moral implications? 

Ms. YERGER. Well, I can comment from a personal standpoint—

the growing gulf between what the top paid executives are receiving and what average workers are—is astonishing and deeply troubling. And it’s ironic for us that, at a time when many companies 

are freezing or eliminating their retirement programs— 

Mr. SANDERS. Right. 

Ms. YERGER.—at the same time, frankly, that they are paying 

their executives so much, and indeed, providing them with quite lucrative retirements— 

Mr. SANDERS. I mean, one of the points that I think Mr. Frank 

made earlier is that what you’re seeing is that CEO’s salaries soar 

in particular companies, these very same companies that are having growing obligations in terms of the pensions of their workers. 

20

And we know of instances where CEO’s have been compensated 

in an incredible way, while at the same time they’re cutting back 

on the pensions of their workers. I would yield to—I don’t know 

how much time I have— 

Mr. BAKER. You are over by about a minute already. 

Mr. SANDERS. Okay, then. I am sorry. 

Mr. BAKER. But I thank you for yielding, anyway. I will just go 

ahead and proceed to the next member, if I may. Let’s see, Mr. 

Price? 

Mr. PRICE. Thank you, Mr. Chairman, and I want to commend 

you for addressing the important areas of cost of business in this 

total discussion. And I appreciate you bringing light to the class action suits and the cost of litigation, because I think it is a significant cost driver. 

Mr. BAKER. Would the gentleman yield on that point? I just want 

to correct my record, if I may. 

Mr. PRICE. You want to stop my clock? 

Mr. BAKER. Yes. I have been accused of doing that a lot. 

The figure that I used earlier, as to the settlement in the Florida 

tobacco litigation per attorney, I cited a figure of $233 million. The 

staff advised me that I was incorrect. It’s actually $283 million, 

with the typical award to the injured party averaging a little over 

$300,000, just for the record. I thank the gentleman. 

Ms. WASSERMAN-SCHULTZ. Would the gentleman yield? 

Mr. PRICE. Not at this point, thank you. I think that hearings on 

those specific issues would be very, very helpful. 

You know, I have oftentimes said that you can’t pay for this kind 

of entertainment. And I don’t mind being entertained. But I find 

it peculiar that we have begun a mocking and denigration of a system that has provided more prosperity and greater opportunity 

than more individuals ever on the face of the earth. 

I think that we need to be commending and attempting to assist 

in our system of capitalism, and not attempt to move down a road 

that I think would be the destruction of our form of not just commerce in society, but our form of government. 

We all believe that disclosure is important, without a doubt. And 

we look forward to assisting the SEC in coming up with appropriate rules and regulations. 

Ms. Minow and Yerger, I would appreciate your comments on the 

statement by Mr. Lehner that the total median compensation for 

CEO’s over the past 10 years has increased by 9.6 percent, and 

that total shareholder return has increased by 12.7 percent over 

that same period of time, and market cap for the business has increased by 8.8 percent. Do you—are those numbers with which you 

agree, or disagree? 

Ms. MINOW. I do not—we do not agree with those numbers. We 

have submitted our own report, which was cited by Mr. Scott earlier, showing that CEO pay in 2004 was up 30 percent, up this 

year, again; 11 percent just in the last 2 years. 

Mr. PRICE. Do you use average or median? 

Ms. MINOW. We use average. 

Mr. PRICE. So you would agree that in using average, it can skew 

the number that you reach. 

21

Ms. MINOW. Yes. However, so can using median. And with regard 

to the specific figures that you are citing, let me say that you have 

sort of an ‘‘X’’ equals ‘‘X’’ result, because since a large part of that 

pay was tied to total shareholder returns, of course it’s going to rise 

with the total shareholder returns of the market as a whole. 

The problem with the current system of stock options is that 70 

percent of those option gains are attributable to the overall market, 

and that’s why we have these anomalous results. 

I am thrilled when Bill Gates makes money. I am thrilled when 

people earn a lot of money and get a lot of money. I am a capitalist. 

It’s when the performance and pay are not linked that there is a 

problem. And that is the problem with the stock option payment, 

is that they just give millions and millions and millions of stock options, so that when the stock goes up a dollar, if you have 2 million 

options, you’ve made $2 million, whether the overall market or 

your company— 

Mr. PRICE. Incentives have been put on the table here as being 

something that is apparently bad, I guess. Do you think that companies ought to be able to offer incentives for their CEO’s for— 

Ms. MINOW. Of course. Listen, I run a business, and I hope my 

sales guy is the highest paid guy in my business, because that benefits me as a shareholder, and as an owner of the business. 

Mr. PRICE. Ms. Yerger— 

Ms. MINOW. So, yes, I believe in incentives. 

Mr. PRICE. Ms. Yerger, do you want to comment on incentives, 

and then very briefly on whether or not you agree or disagree with 

the numbers that Mr. Lehner put on the table? 

Ms. YERGER. Well, first, we are very supportive of incentives, but 

we want executives to be incentivized for long-term sustainable 

performance. So it’s really about how those arrangements and programs are structured. 

Mr. PRICE. Would you agree that the average lifetime for a CEO 

in a major Fortune 500 company today, Ms. Yerger, is four-and-ahalf years? Is that correct? 

Ms. YERGER. I don’t know the number, per se, but I do know it’s 

shortened. 

Mr. PRICE. And how do you determine long-term performance in 

a four-and-a-half year period of time? 

Ms. YERGER. We think it has to do with the business cycle, and 

product cycle. We think 5 years is probably about right, 3 for some 

companies. 

Mr. PRICE. So you reward them after they’re gone? 

Ms. YERGER. No, you’re rewarding them while they’re there. 

Mr. PRICE. Where would—Ms. Minow and Ms. Yerger, where 

would you put the cost of executive compensation on the list of 

items that—in terms of the cost of doing business for a given company? Where does it fit? 

Ms. YERGER. I guess, if I could— 

Mr. PRICE. Go ahead. 

Ms. YERGER.—I would like to comment that, I mean, our testimony has nothing to do with numbers. The Council doesn’t have 

a set magic number that we think executives should be paid. We 

really are about making certain that executives are appropriately 

22

paid for their performance, and we want to address those issues 

where there are abuses and problems with the system. 

Mr. PRICE. Would you— 

Ms. YERGER. So I kind of don’t want to get hung up on numbers 

here. 

Mr. PRICE. Would you agree that areas like taxation and litigation and regulation are significant cost drivers for business, and 

may, in fact, result in more difficult performance for businesses 

than something like executive compensation? 

Ms. YERGER. I would think it probably is a line item issue. Executive pay is a very small number. 

We do think, though, that executive pay has corporate governance ramifications, it has a singling effect. I think it does drive performance and motivate certain behaviors. And that’s why we think 

it’s so important, from a corporate governance standpoint. 

Mr. PRICE. Ms. Minow, my time has expired, but I would love to 

hear your comments. 

Ms. MINOW. Thank you. I think that, as I said, like any other 

asset allocation in the corporation, it has to have a competitive return on investment. And currently, under the current system, the 

return on investment for CEO pay is significantly less than other 

kinds of corporate allocation. 

Mr. PRICE. Where would you put executive compensation in the 

list of items as it relates to taxation or litigation or regulation, in 

terms of importance of cost drivers for business? 

Ms. MINOW. In terms of cost drivers? I would say it’s a very significant one, because I do believe in incentives, and I believe that 

if the incentives are poorly aligned in the pay package—one reason 

for this excessive turnover in CEO’s is because the downside protection is so significant—then I think because it is a cost driver, 

it’s very significant, certainly in the top 10. 

Mr. BAKER. The gentleman’s time has expired. 

Mr. PRICE. Thank you. 

Mr. BAKER. I thank the gentleman. Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. I tried to—or I fear 

to tread in this area, to tell you the truth, although I heard some 

remarks by my colleagues on the other side, and some of the responses, that I guess I have to get into. 

I didn’t know that the Constitution said that we have a capitalist 

system. I understood that we have a Republic, and that the economic system we practice can be any type and still be the United 

States of America. I just wanted to make sure the record reflects 

that, to my knowledge, nothing in the Constitution guarantees a 

capitalist system. 

And going to capitalism, my observation is that we have failed 

to understand remuneration for capitalism, which really represents 

new, inventive ideas. And the reward of those ideas, ultimately, 

may grow into a great company. The Thomas Edisons of the world, 

the Henry Fords of the world, and the Bill Gates of the world have 

been very well-compensated for their novel contributions to the 

capitalist system that exists in America. 

One of the things that disturbed me, though, with the attention 

being paid to—and not being paid to—executive salaries is that 

23

how many great inventors and discoverers in our corporate world 

receive nothing for their great invention? 

And I remember reading, to my astonishment, that the inventor 

of aspirin—which is probably one of the most-used medications in 

our society, and creates tremendous profit for the multiplicity of 

corporations—the initial inventor of that never received one dollar 

of benefit for his great invention. It became the property of the corporation. And everyone has his right to, I guess, surrender by contract their right to reward, but that would be a contradiction to the 

idea of rewarding the inventor, or the creator of wealth and new 

ideas. 

What bothers me in this structure is, one, that we even have to 

inquire into it. It shows something has gone awry here. And two, 

you know, how much money do some people really need? I was reading the Exxon Mobil retirement pension, $400 million, 

and I like to play with mathematics, so I calculated that, at 6 percent return—that’s roughly $24 million a year—so that that poor 

executive would only have $100,000 a day to live on. That’s such 

a piddling amount, really, that we ought to get together here in the 

committee and come up with additional funds so that he can enjoy 

life in excess of $100,000 a day. 

Now, there is nothing immoral about that, I guess, to some people, but I just wonder, your experiences, how about our sister 

economies in the world, in the industrialized world? What is the 

proportion of executive salaries in England? In Japan? In Germany? To my best recollection in reading, we exceed them by such 

gigantic proportions, that it’s almost embarrassing. Is that correct? 

Ms. MINOW. It’s hard to say, because they are not subject to the 

same disclosure rules that we are. There is a lot of hidden compensation. So that, for example, in Japan the salary is quite modest that is disclosed, but there are some undisclosed bonuses and 

benefits that ratchet things up quite a bit. 

There is also the case of Daimler Chrysler. Daimler merged with 

Chrysler and then replaced all of the American executives but kept 

the same pay scales but did not adhere to the disclosure rules. So 

it’s difficult to say. 

But I think it is fair to say that in the United States the pay 

packages are much, much higher than anywhere else. 

Mr. KANJORSKI. Is this perhaps a failure of the functioning process system of corporate life, that the control in corporate life is so 

vested in a limited number of executives that can influence the action, actually, of the compensation committee or the board, and because in very many instances they select the board nominees? 

Ms. MINOW. I think that’s the answer. I think because the CEO 

picks the board, and sets the pay of the board, and determines the 

tenure of the board, we shouldn’t be surprised that the board rewards the CEO. 

In fact, at the Corporate Library, we have found that the single 

most significant indicator of excessive CEO compensation is how 

many other CEO’s are on the compensation committee. 

Mr. KANJORSKI. So, sort of you rub my back and I will rub your 

back, is that— 

Ms. MINOW. Exactly. And then there is almost virus compensation, where you can trace a bad excessive compensation plan, going 

24

from one company to another, as the director brings it back to his 

own company. 

Mr. KANJORSKI. What would be a reasonable solution that the 

Congress doesn’t get involved in setting salaries, but we—I think 

that would be wrong. 

Ms. MINOW. I think the last time Congress got involved—forgive 

me—it was a mistake. I think by setting the cap, and dealing with 

it through the tax code, that was a mistake that had terrible unanticipated consequences. I think the most useful thing that Congress 

can do is the proposal that Mr. Frank has already addressed, giving shareholders the opportunity to vote no. 

Shareholders like the company, they’ve bought into the company, 

they want the company to succeed, and they want the CEO to succeed. But there has to be some kind of a stop-gap. And I don’t 

worry about extremists, because by definition, extremists are not 

the majority. If 60 percent of the shareholders think that the CEO 

is overpaid, then I think it’s fair to say he’s probably overpaid. 

Mr. KANJORSKI. So, transparency, is that— 

Ms. MINOW. Transparency, but you know, you can provide all the 

information, and that’s great, but you have to give the people who 

are getting the information the opportunity to act on it, otherwise 

it’s not going to do any— 

Mr. KANJORSKI. Don’t you think investors may be greedy too, if 

their returns are extraordinary, and they don’t really care? 

Ms. MINOW. That’s fine. Investors should be greedy, because as 

long as we’re going to stick with the system of capitalism, that’s 

part of what drives it. 

Mr. BAKER. The gentleman’s time is expired. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Mr. BAKER. I thank the gentleman. Mr. McHenry? 

Mr. MCHENRY. Thank you, Mr. Chairman. I certainly appreciate 

the ranking Democrat insisting on this meeting. It has been a wonderful display of socialism versus capitalism, and I am proud to say 

I embrace capitalism. 

I didn’t realize it was a revolutionary concept, until I started 

hearing members from the other side of the aisle talk about this, 

that this is a choice for America, that maybe we should be a socialistic republic. It’s just amazing to me. It’s absolutely amazing. 

A colleague who has unfortunately departed talked about contributions, that somehow corporate contributions or executive contributions have an influence on public policy. I would dare say that 

his side of the House should look at compensation that they receive, their contributions that they receive from the trial bar. I 

would say that’s a far larger driver, in terms of shareholder health 

and the value that shareholders get and investors get from corporations, when you look at the pay-out to trial lawyers. 

If we can bring up chart number four, you can see, in real dollars, what is happening in the marketplace. Compensation to trial 

lawyers, $40 billion. Now, how many years is that? That is one 

year. Compensation to the Forbes 500 CEO’s, all of them put together, everything—stock options, performance bonuses—how 

much? $5 billion. 

25

Trial lawyers are the ones who are sopping up investor health in 

this country, and driving companies to delist in this marketplace 

and go to other places around the world. 

I would love to hear your comments, Mr. Lehner, in terms of— 

Mr. LEHNER. You have no argument from me on that point. 

Mr. MCHENRY. That’s a good answer. I suspect you don’t believe 

in socialism, you believe in capitalism, maybe. Ms. Yerger? You 

look interested. 

Mr. KANJORSKI. Will the gentleman yield for a moment, since 

you’re going to make a comparison? 

Mr. MCHENRY. If I may finish with my questioning, I will do that 

at the end, Mr. Kanjorski. 

Ms. YERGER. First, there may be agreement on one thing, and 

that is that probably all lawyers are overpaid. I will comment that 

from Council members’ perspectives, who again, are long-term owners, they are owners of these companies before an alleged problem, 

during an alleged problem, and after an alleged problem, securities 

litigation is sort of the last step for them. I mean, that’s a draconian measure at the most problematic companies. And we think it 

does play a role. 

There has been plenty of evidence that when institutional investors are the lead plaintiffs in these cases, and are doing their jobs, 

overseeing the case progress and negotiating the contracts with the 

plaintiffs’ firms, the fees go down. And we think it’s very important 

that the process be set up, as Nell said earlier, that these cases not 

be plaintiff driven, but are—or excuse me, lawyer-driven, but indeed be driven by meaningful plaintiffs. 

Mr. MCHENRY. So you would like to see some reform of that process? 

Ms. YERGER. I think it’s worthy of a review, yes. 

Mr. MCHENRY. Well, that would be wonderful to come back and 

discuss the chairman’s bill, the legislation that we’re proposing. 

Incidentally, Milberg Weiss today—I think it would be a little 

overplay about the Enron guys going to jail, which certainly is a 

market-driven force, that their company went bust, and they went 

bust, and now they’re going bye-bye, it shows that our laws work 

in this country, and bad people go to jail for bad performance and 

bad things that they did—but Milberg Weiss, big plaintiffs law 

firm, specializes in securities class action suits, again, a driving 

force in security litigation, the law firm, you know, they’ve been indicted, and some of their top lawyers—incidentally, large donors to 

the other side of the aisle—you know, they got caught giving $11 

million in kick-backs for those in the class of shareholders that 

were part of the process. 

Now, that is certainly egregious, and they have been involved in 

150 lawsuits. Certainly I would say that factor there should be 

what we should—should be our discussion today, not about executive compensation. Because as a shareholder, as I am in certain 

companies that I disclose, I have the ability to use the marketplace 

and walk. And I would say that the marketplace does have some 

strength in this. Would you agree, Ms. Minow? 

Ms. MINOW. I think the marketplace—there are significant impediments to market forces, with regard to CEO pay. I share a lot 

of your concerns about the litigation, but I think with regard to the 

26

earlier chart that we saw with the spike in settlement amounts, 

you would have to recognize that we also had a spike in scandals, 

and I think that there is a correlation there. 

Mr. MCHENRY. There is a correlation? But you mentioned before 

that rating agencies— 

Ms. MINOW. Yes. 

Mr. MCHENRY.—that market forces work— 

Ms. MINOW. Yes. 

Mr. MCHENRY.—there. 

Ms. MINOW. I am a capitalist. I— 

Mr. MCHENRY. So you’re saying that market forces don’t work in 

terms of shareholders moving their capital out of that company because they don’t see it being governed correctly? 

Ms. MINOW. Correct. We have talked about that earlier. Most of 

the large shareholders are essentially permanent investors. And 

when there is a pervasive problem, there is really no—the transaction costs are prohibitive. There is really nowhere for them to go. 

So, for me, the market impediment here is the inability of shareholders to provide any feedback, any oversight, with regard to this 

disclosure information, which is very valuable. 

Mr. MCHENRY. Mr. Chairman, I would love for you to call a hearing and discuss the impact of trial lawyers and the impact that 

they are having on investors today. And that huge, enormous cost 

to every investor across this country of out-of-control lawsuits, especially with these securities litigations, and especially with this 

firm that has been indicted. I would certainly appreciate it, and I 

would certainly appreciate your leadership on creating legislation 

that will address this enormous problem. 

Mr. BAKER. I thank the gentleman— 

Mr. FRANK. Would the gentleman yield for 10 seconds? 

Mr. MCHENRY. I am out of time. 

Mr. FRANK. If I could get 10 seconds, I just want to say we rarely 

have control over the hearings, but if the majority wanted to call 

that hearing, we would be glad to come. But I should make a note. 

The majority controls the hearings, we have very little to say about 

it. 

Mr. MCHENRY. You would support that, Mr. Frank? 

Mr. FRANK. I just said I would. Maybe I talk too fast. 

Mr. MCHENRY. I’m from the South. We process a little slower. 

Ms. MINOW. And I would be delighted to come back and testify 

on that point, because it’s a matter of great concern to me. I have 

written about it a good deal. 

Mr. BAKER. Thank you very much. The gentleman’s time is long 

expired. 

Mr. KANJORSKI. Mr. Chairman? 

Mr. BAKER. I’m sorry? 

Mr. KANJORSKI. May I have—I requested 30 minutes, and it 

wasn’t available. I just wanted to correct, on the record— 

Mr. BAKER. Seconds? 

Mr. KANJORSKI. Yes, 30 seconds. 

Mr. BAKER. Thank you. 

Mr. KANJORSKI. The statistics offered by Mr. McHenry showed the Fortune 500 CEO’s receiving $5 billion, and then he said, I 

think, the fees of the trial bar at $40 billion. And I have no reason 

27

to dispute those two figures, except I would like to say that there 

are probably 500,000 trial lawyers and only 500 CEO’s. 

And I think the first statistics should be let’s take the top 500 

litigators, or trial lawyers, and compare them to the salaries of the 

top 500 CEO’s, and that would be more comparing apples to apples. 

Mr. MCHENRY. Mr. Chairman, I would say that, to address this, 

to be fair and simple about it, one law firm, one securities law firm, 

netted almost $2 billion over the course of 10 years by targeting 

investor classes. And so, let’s put that up there, compared to CEO 

compensation. The trial lawyers are raking it in— 

Mr. BAKER. If I can suggest, we need to get back to regular 

order, because we’re going to be killing each other here in a 

minute. Mr. Watt? 

Mr. WATT. This is so bizarre, that I’m not even going to get in 

it. 

[Laughter] 

Mr. WATT. But I appreciate the offer. I thought we were having 

a hearing about executive compensation, but obviously my friend 

from North Carolina thinks that this is more about politics and 

beating up on trial lawyers. So, you know, that’s bizarre. Maybe it 

helps his entry into the leadership, or whatever he thinks his ratings are publicly, but I think it’s embarrassing to this committee. 

I yield back. 

Mr. BAKER. I thank the gentleman for yielding back. Mr. Paul? 

Mr. PAUL. Thank you, Mr. Chairman. I find the hearing and debate very interesting. I would like to start off by saying that recently Mises and Hayek was used to defend the position that protective tariffs on sugar was not a good idea, and I would like to 

suggest also that if you further read Mises and Hayek, they would 

argue the case that it is no business of the politician to deal with 

something as subjective as compensation. 

Excessive compensation is a purely arbitrary concept. There is no 

way that you can come up with an objective figure to measure anybody’s compensation, except maybe the U.S. Congress, and if you 

took—went to the American people, they would probably endorse 

the idea that there is excessive compensation of Representatives. 

This whole idea that they don’t deserve their pay, or a false incentive, what about the pay of a guy throwing a baseball, whether 

it’s 90 miles an hour or 100? He has a tremendous incentive to 

work. And he makes $10,000 a pitch. I mean, who gets hysterical 

about that? What about somebody who gets on a stage and is on 

a stage for 30 minutes and makes $20 million? That sounds excessive and abusive and obscene to me, but no, we don’t attack that. 

So, I find this is misplaced. There are a lot of people in this Congress making sure government doesn’t make a moral judgment on 

our personal behavior, our lifestyles and our habits, our drinking 

habits. And as far as I’m concerned, it is none of the government’s 

business. But as soon as there are personal choices and personal 

decisions made regarding personal compensations, excluding trial 

lawyers and excluding movie stars and baseball players, they are 

fair game, because they are evil and monstrous, and we have to 

limit it, and we can’t have the moral authority to defend the right 

of freedom. 

28

What about a Bill Gates? I mean, how much more money could he make? And who cares? I mean, if he has $10 billion or $100 billion, he deserves it because he produces a product and he produces 

jobs. 

Now, there are some things that I would concede about this. I 

think there is abuse. Matter of fact, I agree with the comments 

from the gentleman from Vermont about the gap between the rich 

and the poor. But the market isn’t the reason these problems exist. 

This is a natural consequence of what happens when a country destroys their money. You wipe out the middle class, and you create 

excesses in certain areas. 

What happened when we had the NASDAQ bubble? Were there 

excessive salaries? It wasn’t lack of regulation. We had this abuse 

because there was so much money flowing in there, and so much 

speculation, and the people were swallowed up into it, and people 

made millions and millions, and a lot of little people lost their 

money. 

But it’s a monetary phenomenon. It is not a lack of freedom phenomenon. And what we’re doing here in this attack on freedom of 

choice and making a decision is because the market decided that 

somebody could make so much money, and if we could only limit 

the compensation, we’re going to solve our problem. I will tell you, 

I think we’re completely off the track. 

And I put in my vote for the market economy and for freedom 

and personal choices, and a sound economy where you don’t have 

this distribution of wealth that comes about where the rich and the 

poor have a huge gap. And it’s going to get a lot worse. And I will 

tell you what. When you come in with more regulations and decide 

about who is going to serve on boards and over-regulate corporations, let me tell you, things are going to get much, much worse, 

because you’re dealing with symptoms, and you’re not dealing with 

the cause. 

We need a stronger defense from the business community to defend liberty, to defend capitalism. It’s a moral defense. It’s a moral 

defense of freedom—with the restriction no fraud. But the greatest 

fraud is what we’re doing with our monetary system, and that is 

created by us, here in the government. And that’s what we have 

to deal with. 

And I yield to the panel, if you have any comments about this 

statement. 

Ms. MINOW. I would like to speak. I associate myself with almost 

everything you said. I completely agree, it is not up to Congress to 

decide what somebody should get paid, and I have already spoken 

about my enthusiasm for Bill Gates’s salary and also for the very, 

very market-driven system of setting salaries for athletes and performers. 

The problem is, as long as we’re allowing CEO’s to pick the people who set their pay, we have these anomalous results where the 

pay and performance are not linked, and that’s what we’re trying 

to address here, by putting that power—removing the market impediment to having the people who provide the capital having some 

say, either in the selection of directors or in capping excessive pay. 

So let’s put that right back into the market. That’s what I support. 

Mr. PAUL. Any other comments? 

29

Ms. YERGER. I would just second what Nell says. Our—from the 

Council’s perspective, the most important thing is to make certain 

that there is full transparency of these arrangements, so that the 

market can understand them and assess them. 

Mr. LEHNER. I, too, would associate myself with a lot of your 

comments. As a general rule, I don’t think it’s a fair statement that 

every member of these boards just go ahead and rubber stamp 

what the CEO’s want, or that the CEO’s necessarily reach out and 

hand-pick all of their directors. 

I think boards have gotten much more vigilant the last few 

years. There are associations of boards that you can reach out and 

talk to. They have reams of information on nominating committees 

and boards, and I would encourage you to look at that, as well. 

Mr. PAUL. Let me just take 1 second. I would say the market 

worked rather well, in spite of the fact that I believe the government created the financial bubbles, the market did eliminate the 

bubble, and those salaries came down. So there are market forces 

that can accomplish, I think, what we’re all anxious to see. And I 

yield back. 

Mr. BAKER. I thank the gentleman for yielding back. I would just 

point out for the record, since we have touched on athletics, the 

Yankees are paying A-Rod $25 million to bat 270. I think we ought 

to get that in the next— 

[Laughter] 

Mr. BAKER. Mr. Miller? 

Ms. MINOW. Let’s have a hearing on that. 

Mr. FRANK. Will the gentleman yield? 

Mr. MILLER. I yield 10 seconds to Mr. Frank. 

Mr. FRANK. Well, first, as to athletes—and let me just say, since 

it came up—if we went to a la carte cable pricing, and people didn’t 

have to buy—because what’s supporting athletes’ salaries is the 

poor cable person. I would be willing to make that a la carte, and 

that’s where that comes from. 

Beyond that, though, I would just say to my friend from Texas, 

since he was obviously alluding to—I think I’m the only one who 

quoted an Austrian economist, so he probably meant me—I agree, 

it is none of our business to set things, to set salaries. All we are 

talking about is, first of all, it’s the SEC, under our former Republican colleague, that is intervening to require corporations to give 

out more information. I think they are doing it correctly, as does 

the Business Roundtable, essentially. 

Beyond that, all we are saying here in this bill is let the stockholders do it. So I don’t think anybody is advocating having Congress set anything at all, substantively. We are saying we do believe that the shareholders ought to be strengthened in what they 

can do. 

Mr. MILLER. Mr. Chairman, I understand I now have 4 minutes 

and 50 seconds. 

Ms. Minow, I wanted to clarify a point that was raised in questioning earlier to Mr. Price’s questions. I understood your report 

was that because there are 27 CEO’s whose salaries from 2003—

or compensation increased from 2003 to 2004 by 1,000 percent, that 

the average compensation increase for CEO’s of public corporations 

30

went up by 91 percent. But the median compensation went up 30 

percent. Is that correct? 

Ms. MINOW. That is correct, thank you very much, sir. 

Mr. MILLER. Okay. USA Today looked at the SEC filings of public corporations during the same period, and concluded it was 25 

percent, but that was 25 percent to $14 million. Does that sound 

like about the right figure? 

Ms. MINOW. Yes, it does. The reason that it is so hard to get an 

accurate figure is that there are different methods of computing the 

value of the option grants, and as has already been mentioned before, there is a little bit of a sort of elephant in the boa constrictor 

effect there, where the option grants are exercised in 1 year, and 

so people look at them in different ways. But yes. 

Mr. MILLER. So there are some transparency issues. 

Ms. MINOW. Yes. 

Mr. MILLER. Mr. Lehner, you said that so much of the debate 

was about the outliers, and the public outrage, and we’ve got to 

look at the median, and not the average. 

Mr. LEHNER. Right. 

Mr. MILLER. And that the median—do you agree with USA Today’s figure, that the median compensation for a CEO of a public 

corporation in 2004 was about $14 million? 

Mr. LEHNER. No. Actually, the information that we looked at, 

using the Mercer 350 database, which is the one that is featured 

every year in the Wall Street Journal, as we read it, indicates that 

the median total pay for CEO’s from 2004 to 2005 declined slightly 

from $6.8 million—to 6.8 million from $7.0 million. 

Mr. MILLER. That’s a pretty big difference. 

Mr. LEHNER. I think Nell touched on something. I think you’re 

probably looking at some options that were probably exercised. And 

that’s not that they exercise those each and every year. 

Mr. MILLER. So you did not count options as part of your total 

compensation? 

Mr. LEHNER. Total return for every year, but if—again, if you’re 

in a situation where options are exercised that may represent 10 

years’ worth of options, that is not to say that they get that amount 

each and every year. 

Mr. MILLER. Okay. So, again, there apparently are some transparency issues in knowing exactly what CEO’s are getting paid, 

or— 

Mr. LEHNER. And I should say that I, you know, I think as we 

go forward, and the SEC presumably implements the rule next 

year, I think you will see less of this discussion about which set 

of numbers to use. 

Mr. MILLER. Okay. A second point that I was intrigued by. You 

said that there needed to be—the compensation committees needed 

to be by independent directors. Now, we have dealt with that issue 

through mutual funds legislation. 

Mr. LEHNER. Right. 

Mr. MILLER. My impression was that it didn’t really matter how 

many independent directors you had, because the problem was they 

weren’t all that independent. 

We defined independent directors by what they’re not. They’re 

not employees, they’re not family members. It doesn’t mean that 

31

they’re tough-minded skeptics, it just means that they don’t have 

certain defined relationships. Is that what you mean when you say 

independent? 

Mr. LEHNER. Generally, yes. I think the important thing for directors is that I think, especially in this day and age, most if not 

all of them realize that they have to approach these compensation 

packages with a healthy degree of skepticism. 

Mr. MILLER. Okay. I think it was either Ms. Yerger or Ms. 

Minow—I don’t recall which—but one said the greatest predictor of 

what a board was going to award in salaries was how many CEO’s 

of other corporations sat on the compensation committee. 

And that, in fact, it had kind of a chain reaction that if the CEO 

of Corporation B sat on the compensation committee, was on the 

board and on the compensation committee of Corporation A, then 

they were inclined to vote for a very generous salary for the CEO 

of Corporation A. And then when Corporation B looked at—reviewed salary, they looked at what Corporation A had paid. 

Do you agree with—first of all, would the CEO of another corporation be an independent director, for purposes of your requirement, your proposed requirement, that—or recommendation that 

compensation committees be composed of independent directors? 

Mr. LEHNER. They are independent by definition of the New York 

Stock Exchange, if they’re not an employee of a company, or— 

Mr. MILLER. Okay. 

Mr. LEHNER.—or otherwise involved. I actually haven’t looked at 

that data, but I would caution against guilt by association. 

Mr. MILLER. Okay. One last question before it becomes red. I 

know there have been more philosophical discussions here than I 

have ever heard in Congress or perhaps in politics. 

Chairman Greenspan, a conservative Republican, has sat at that 

table many times. And if I may translate into English—I’m not 

sure that Chairman Greenspan would have been allowed to testify 

before this committee if the Senate immigration bill had passed by 

that time—but to translate into English, he said that for a society 

to work, it’s got to be fair, and it’s got to be perceived as fair by 

the members of that society. 

And the widening gap between the richest Americans and most 

Americans was very unhealthy for democracy. It undermined our 

faith in institutions, it undermined our sense that our society was 

fair, and it undermined our faith in democracy. Do you agree with 

Chairman Greenspan? 

Mr. LEHNER. Well, I think we all have individual views on the 

widening gap, and I certainly, on a personal level, have agreed 

with a few of them. But I think the point of the discussion today—

at least the point that we’re trying to make—is you can’t just apply 

that standard to CEO’s. If we’re going to have that discussion 

about a society, and what people get paid, and what kind of wealth 

they’re allowed to accumulate, that’s a whole separate set of discussions. 

Mr. BAKER. The gentleman’s time has expired. I thank the gentleman. Mr. Pearce? 

Mr. PEARCE. Thank you, Mr. Chairman. The discussion is fascinating, I appreciate this. I hope, as you’re talking about executive 

compensation and lack of productivity, and especially given Mr. 

32

Kanjorski’s comments about how much do you need a day to live, 

I just dearly hope you’re not including Congress. I’m not sure exactly what we do produce, but I do know that my constituents wonder if I need $454 a day to live. And so, we will slip by that without 

giving you all a comment. I’m afraid of what you might say. 

I would agree with the transparency, that the more transparent, 

the better we are. What about the effect—you’re worried about the 

effect of the undermining of our capitalist system. What about the 

effect of our labor leaders, executives? Are they considered executives? 

In other words, in your concepts of transparency, are they considered executives, as far as performance, and as far as productive 

output, and as far as the compensation, and as far as compensation 

that is set by their peers, and as far as their ability to actually pick 

the people who set their pay? I see a lot of similarities. 

What damage does this do, when we have no transparency, and 

in fact, no ability to even go in and insist on seeing any of the 

records? And especially when they have maybe been taking a little 

bit from the till from their people that is not included in their compensation package? How about the damages of that, and have you 

measured that, and do you contemplate that alongside the executive pay packages? 

Ms. MINOW. Well, sir, my expertise is in public companies. But 

my sense is that, with regard to labor and other private organizations, there is a very strong system of accountability there, as we 

have seen with the union having parts of the union break off, and 

start up new. And so it seems there is a very strong market system 

of accountability there. 

Mr. PEARCE. Are there examples of the not-strong market system 

working? I think I see examples where members are forbidden—for 

instance, in the State of New Mexico, just this year, some of the 

labor, small labor organizations, were going to break off. And the 

Governor went in and said, ‘‘We’re going to put a 10-year moratorium on your ability’’—they had already taken the votes. 

So, first of all, he wrote all labor into one labor union. So now, 

instead of 10 percent of your local, you had to have 10 percent 

statewide for a 10-year moratorium. Now, that doesn’t exactly 

sound like accountability and fairness. And this lack of fairness, I 

would appreciate my colleagues’ comments on fairness and the society failing due to it. What do you say, Ms. Yerger, what about that 

situation that exists this year in New Mexico? It’s not a pretense. 

Ms. YERGER. I have, honestly, no expertise in labor issues, and 

I actually— 

Mr. PEARCE. No, I mean, it’s just a matter of fairness, it’s a matter of—it’s just a moral question. You don’t have to know labor, it’s 

just— 

Ms. YERGER. But I think, from our perspective, we’re representing investors in publicly-traded companies, and we’re giving 

money to publicly-traded companies, and that is the focus. 

Mr. PEARCE. Okay. What about the idea of fairness? Should we 

go in and—you remember the dot coms. You remember those companies that had no sales? They didn’t yet have a product. And yet, 

the stock market attributed to those people’s exorbitant salaries. 

33

Should we curb the stock market from doing that? Should we go 

in and tell the stock market, ‘‘You’re not allowed to buy this stock, 

and you’re definitely not allowed to inflate the stock from a $1 a 

share to $200 a share before it ever has a product.’’ So how do you 

resolve these kinds of questions? 

Ms. MINOW. Again, I think that’s an ideal situation for the market to resolve. Anybody who is dumb enough to buy stock in a company that isn’t making any money deserves exactly what they get 

when that company tanks. 

Mr. PEARCE. So, why is it necessary, then, for us to speak about 

executive compensation when there is no performance. Why don’t 

those stockholders deserve what they get for investing in a company where the CEO is over-compensated? I am not sure I follow 

the symmetry of your argument. 

Ms. MINOW. Well, you are talking about two different things. 

One is an IPO. The other is a situation where most of the large 

investors, as we have said, are essentially permanent shareholders. 

If they want to sell out— 

Mr. PEARCE. With all respect, let’s step back 1 second. 

Ms. MINOW. Yes. 

Mr. PEARCE. Only the IPO’s are affected. Once it’s out on the 

market, there is no longer an IPO. It was as a stock that it was 

driven from $1 to $200. 

Ms. MINOW. Right. 

Mr. PEARCE. So, if you would stay on that particular point— 

Ms. MINOW. Yes, but— 

Mr. PEARCE. Why is that different from Exxon Mobil? The 

price—if you’re willing to buy Exxon stock—we’ve got transparency, 

and I agree with that piece— 

Ms. MINOW. Right. 

Mr. PEARCE. Why shouldn’t you be allowed to buy Exxon stock 

or not buy it, and you suffer the consequences of your action, exactly the way you would with a dot com? I’m not following the symmetry of your argument. 

Mr. BAKER. That’s the gentleman’s last question— 

Mr. PEARCE. Thank you, I appreciate that. 

Mr. BAKER. But please respond. 

Ms. MINOW. Okay, thank you. The answer is that right now, our 

system is predicated on a theoretical accountability to the market 

with the right of shareholders to respond to elect directors, and 

that theoretical ability is not, in fact, in place. And I think it creates these anomalies. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Mr. BAKER. I thank the gentleman for yielding back. Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. You know, this 

has been an interesting debate, and an interesting conversation. 

But I am reminded—and as I remind my friends on the other side 

of the aisle, who tend to want to make this a debate between socialism or capitalism—let there be no doubt, it might be wise for 

us to recall the words of Alexander Hamilton, where he said, ‘‘Indeed, our capitalistic system is here, and is determined by the free 

force of supply and demand. However, from time to time, it takes 

a centralized government to make sure it endures through the 

ages.’’ 

34

Our history is replete with examples where there have been excesses, where those of us who have been concerned about the maximum preservation of our capitalistic system have had to provide 

the leadership to move to do so. Need I recount the depression? 

Need I recount ups and downs in our economy as we have moved 

forward? 

There are excesses here. This is not an attempt to undermine the 

capitalistic system. It is an attempt to protect and enhance it to 

make sure that it endures. We have situations here where executives out of greed—not all of them, but there are examples. 

Here is one. You have Mr. Lee Raymond. He’s a good guy. I have 

nothing against Mr. Raymond. But here is Mr. Raymond, whose executive package totals a bonus of $100 million, while his company 

is underfunding the pension by $11 billion. Don’t we owe something 

to those pensioners, to those workers, to those people who have invested their future in that company? 

Now, we have to respond to that. It’s no mystery here. If we don’t 

respond to these examples, our companies are sitting in clearly conflicting positions. Need I recall the merger and acquisition situation 

with RJR Nabisco? Maybe 10 years ago? But that CEO drove the 

company down, had a parachute, got extraordinary amounts of 

money, and the company took a nose dive as a result of that. That’s 

just rank selfishness. And not all CEO’s are like that. So how do 

we respond to that? 

This bill is simply a transparency bill. All it does is simply say 

that let’s disclose to the shareholders the information of how the 

compensation packages are put together, so that we can have a better system in which people will have confidence. There is no debate 

here over socialism or capitalism. If anything, this is a debate to 

preserve and enhance our capitalism. 

Now, Ms. Minow, I would like to ask you if you could share with 

us how serious this pay-for-performance and equity and disparity 

is, and how devastating it is to our system at this time. 

Ms. MINOW. Thank you, Mr. Scott. I would like to refer you to 

page two of my testimony, where we have a chart with some examples. And I am glad that you brought up the example of Lee Raymond, because it seems to me that that’s a very good example of 

a company that should attract the attention of the U.S. Congress, 

because the profits of that company that supported his bonus really 

had nothing to do with his creating new products or coming up 

with better services, or even cutting costs. They were really the results of problems in the world economy with regard to oil practices 

and oil pricing, and he benefitted from that in a way that was, I 

think, detrimental to his company, his shareholders, his employees, 

and our economy. 

If you look at that chart on page two of my testimony, you will 

see some examples here of companies, showing the pay packages 

next to the 5-year total shareholder returns. So, you have the first 

one, AT&T, Mr. Whitacre getting $34.4 million with a company 

that had a 5-year total shareholder return of –40.32. 

And I think, again, that this really severely undermines the 

credibility of our capitalist system. I don’t know how we can expect 

shareholders to respond to pay anomalies like this if we don’t give 

35

them the right either to elect directors or to vote down these pay 

packages. 

You look at Home Depot. Home Depot, I would like to bring up, 

had their annual meeting today, where not one director attended 

to hear the complaints of the shareholders, and where they cut off 

the power to the microphones when the shareholders got up to ask 

questions about the pay package there, which is an outrage. And 

there again, we had somebody on the compensation committee who 

also served on the compensation committees of the New York Stock 

Exchange and General Electric, with the famous retirement plan 

for Jack Welch. 

So, if we—we have to stop them before they pay again, basically. 

We have to find some way to replace directors who, over and over 

again, agree to excessive pay. 

Mr. BAKER. The gentleman’s time has expired. 

Mr. SCOTT. Thank you, sir. 

Mr. BAKER. Thank you, Mr. Scott. Mr. Campbell? 

Mr. CAMPBELL. Thank you, Mr. Chairman. First of all, I am 

pleased that, neither on the panel or the dais, are we talking about 

having the government try and figure this out. So that’s good. 

So, what we are talking about here is connecting the owners of 

the company with the compensation somehow. And I guess I want 

to try and dig into that a little bit, because sometimes it’s easy to 

talk about in theory, and much harder to make it work in practice. 

I mean, we currently have a system, where you get a proxy and 

it explains all this stuff, and you get to vote for the directors or not, 

and sometimes there are shareholder proposals on there, as well. 

Probably a lot of people throw those away, don’t vote them. There 

are institutional shareholders, there are obviously mutual funds 

and pension plans, and so forth. In many cases, there will be large 

blocks owned by founding shareholders or whatever. 

I guess why isn’t that working now? I mean, why, if—and maybe 

to Ms. Yerger first, and then whoever else wants to, why—if we believe that this isn’t working, then why isn’t it working now? I 

mean, I would like to hear what you all say. 

Ms. YERGER. The SEC pay disclosure rules were last substantially amended, I think, 13, or 15 years ago. And there have been, 

obviously, tremendous changes in executive pay over that period of 

time. We have heard the numbers. And the fact is that I think that 

companies have gotten—and compensation consultants have gotten—very good about identifying ways to pay without having to disclose it. 

So, we’re in a situation right now, frankly, where the transparency is not adequate. And I think that the SEC recognizes that. 

And from what I am hearing here, that is one point of agreement, 

is that transparency of this is a good thing. So, I mean, one problem right now is that it’s very difficult to understand clearly how 

much, and how executives are being compensated. 

Mr. CAMPBELL. So, with adequate transparency, in your view, 

does the current system then of electing—shareholders, etc., proxies, and so forth, have the opportunity to work? 

Ms. YERGER. Well, as the Council’s testimony notes, we think 

that it is very important that directors be accountable for these pay 

decisions. As a result, we are very, very, very strongly in favor of 

36

majority voting for directors, so there is a way to hold the directors 

accountable for these decisions. 

Mr. CAMPBELL. Okay. Ms. Minow? 

Ms. MINOW. I agree with the Council’s position on that. Ideally, 

I would love a system where shareholders got an up/down vote on 

executive pay, as they have in the UK. But for me, the primary priority is this adoption of the majority vote, and I would love to see 

the Business Roundtable push a little harder on the members who 

have not adopted it. Because if shareholders could vote no— 

Mr. CAMPBELL. They would not have adopted what? I’m sorry, 

not— 

Ms. MINOW. The majority voting for— 

Mr. CAMPBELL. Majority vote, right. 

Ms. MINOW.—so that directors couldn’t serve unless they had a 

majority of the vote. Right now, for example, at AIG, there is a director serving who did not get a majority of the shareholder vote 

last year. At Blockbuster, there is a director serving who did not 

get a majority of the vote. 

Mr. CAMPBELL. A majority of those voting, you’re saying— 

Ms. MINOW. Yes, yes. 

Mr. CAMPBELL. Not a majority of the shares outstanding. 

Ms. MINOW. That’s correct. 

Mr. CAMPBELL. Right, okay. And you know, the proposal of voting on compensation, the only thing is once you go down that road, 

I mean, you know, shouldn’t—should shareholders vote on a business plan? Should they vote on the advertising budget? Should they 

vote on a union contract? Should they vote on pension plans that 

arguably go—you know, you could extrapolate that into a whole lot 

of other things, which becomes a little dangerous— 

Ms. MINOW. I absolutely— 

Mr. CAMPBELL.—initiatives in California— 

Ms. MINOW. I absolutely agree with you, Mr. Campbell. I don’t 

intend to turn corporations into referenda. 

Mr. CAMPBELL. Right. 

Ms. MINOW. And as long as shareholders have a say in who 

serves on the board, I will be happy. 

Mr. CAMPBELL. Right. Okay, thank you. Mr. Lehner? 

Mr. LEHNER. I think that I agree with a lot of the comments that 

Ann and Nell just made. I do take exception in some areas. Again, 

I think majority voting is, for the time being, a decision best left 

for companies to make. 

I do think that you would be setting a dangerous precedent if you 

had shareholders voting directly on compensation packages. There 

is a reason that—a historical and a legal reason—why that has not 

been the case. As I indicated in my testimony, shareholders are not 

liable for company actions. The board and the CEO’s necessarily 

make those decisions. 

I think if you start getting into having shareholders make active 

decisions about who runs companies and what decisions they make 

and how they’re going to get paid, you open shareholders themselves to litigation, and I certainly don’t think the trial bar would 

be shy about going after large institutional shareholders if they felt 

like they could get some settlement money out of it. I don’t think 

you want to go down that road. 

37

Mr. CAMPBELL. Thank you very much. Mr. Chairman, I yield 

back. 

Mr. BAKER. The gentleman yields back. Mr. Green? 

Mr. FRANK. Would the gentleman yield to me for 5 seconds? 

Mr. GREEN. Yes, sir. 

Mr. FRANK. Well, I might be prepared—we will take this under 

advisement, but if people on the other side from this bill would 

rather us—instead of acquiring a shareholder vote on compensation, would rather us substitute a bill requiring a majority vote on 

directors, I am in a conciliatory mood. 

So, you may have persuaded me with the substance, if not the 

specifics, and we will—when we get a mark-up, we will think about 

that. So that may be the alternative. We would be glad to think 

about that. 

Mr. GREEN. Thank you, Mr. Chairman, and I thank the ranking 

member for hosting this hearing. And I thank the members of the 

panel. We want to apologize for arriving a little late. I had some 

pressing business, an electronic town hall meeting that I had to attend. 

And many of those persons that I talked to, communicated with, 

I’m sure would agree with this principle, and it is that we live in 

a world where it’s not enough for things to be right; they must also 

look right. We really do live in that kind of world. 

Now, it may be right for CEO’s to receive approximately 140 

times the pay of the average worker, but I guarantee it doesn’t look 

right to people in this country. People in this country are starting 

to question what we are trying to make transparent. And at some 

point, whether we like it or not, no matter how we justify it, people 

are going to rebel. They are not going to continue to allow this kind 

of business-as-usual to continue. 

People think that there are limits, and my suspicion is that there 

are some people here in Congress who think that there are limits, 

because we have imposed limits on some others. We have done 

this. This is not the genesis of imposing limits. This is not the genesis of investigating to the extent that we conclude that we want 

to make things not only be right but look right. 

So, my question will be simply this; what is wrong with transparency? Does someone have an indication from me as to what is 

wrong with putting all of the cards on the table, so that the persons who invest in corporations will know what’s taking place, and 

how the money is being spent? What’s wrong with transparency? 

Yes, sir? 

Mr. LEHNER. Absolutely nothing. In fact, we support transparency. And I just—I might add that there was a question asked 

earlier by another member that ties very nicely into yours, and 

that is what is a reasonable solution? And my answer to you is the 

reasonable solution is to let the SEC do its job. 

They have put forward, I think, a very comprehensive proposal 

on disclosing the executive compensation and providing transparency. We have supported that, and I think that’s going to go 

right to the heart of a lot of the questions that have been raised 

here today. 

Mr. GREEN. Now, if we have transparency, it has to be there for 

some reason. Once people are aware, they should be in a position 

38

to do something. What would you propose that shareholders be permitted to do, once they acquire this intelligence? 

Mr. LEHNER. They then have the information to make informed 

decisions about where they want to invest their money. 

Mr. GREEN. And what would you propose that they do if they are 

of the opinion that their money has been used unwisely, and that 

there has been some abuse? What would you propose that they do? 

Mr. LEHNER. Well, the first thing that I would tell them is to invest someplace else. I mean, CEO’s and boards— 

Mr. GREEN. Well, it’s easy to say invest it someplace else— 

Mr. LEHNER. Right. 

Mr. GREEN. It’s not—you know, it’s not your money that is—that 

has been abused and been misused. Why can we not empower 

shareholders, so that they can do what we don’t want government 

to do? Why can’t we let these shareholders have some power, some 

influence on this process? Why would you not do that, now that 

they’re intelligent, and they’ve been enlightened? 

Mr. LEHNER. Sure. And it’s not a question of not empowering 

them. I mean, I am also an investor, as I think are 83 percent of 

the American public. 

Mr. GREEN. But do we trust the American public? 

Mr. LEHNER. Oh, I think we always have to trust people to make 

the best— 

Mr. GREEN. Well, if we trust them, why can we not allow them 

to acquire intelligence and to have some ability to do something 

with that intelligence, to act? Why can’t we do that? What is wrong 

with giving shareholders the ability to act? 

Mr. LEHNER. And I think you’re right. I think the question is giving them the information and trusting them to determine for themselves what is best for them. I don’t think government should be 

prescribing what kinds of decisions investors should be making. 

That’s something that—investors should make that determination 

on their own. 

Mr. GREEN. Are they not making that determination on their 

own after acquiring the intelligence and making some decision as 

to how they want their money spent? 

Mr. LEHNER. I really can’t answer how individual investors respond, once they are given information. They have investment advisors available to them, and plan administrators, and so forth. 

Mr. GREEN. But no, let’s talk about salaries. 

Mr. BAKER. If we can talk about it briefly. Your time has expired, 

but please feel free to pose your last question, if you— 

Mr. GREEN. Well, let me just end with this. We had no problem, 

it seems—or, there were some problems, I’m sure—but we have 

regulated others. The genesis of this regulation is not this bill. 

There are others who have been regulated. And for us to today conclude that this is inappropriate, it’s something that is beyond the 

pale, really goes beyond the pale itself. Thank you. 

Mr. BAKER. And if I may make just a brief announcement, it is 

my intention to recognize Ms. Wasserman-Schultz for her questions, thank the first panel, and let them be excused, and notify the 

second panel that, pending several votes, we are going to be over 

there for a few minutes. We have four votes. It will be at least 30 

39

or 40 minutes before we’re able to get back for the second panel. 

Ms. Wasserman-Schultz— 

Mr. FRANK. I apologize to the second panel. We didn’t expect 

this. Many of us will be coming back. So if you can stay, we appreciate it, and we apologize. 

Mr. BAKER. Ms. Wasserman-Schultz? 

Ms. WASSERMAN-SCHULTZ. Thank you, Mr. Chairman. And I am 

glad that my good friend from North Carolina is still here, so I can 

profess my undying devotion to capitalism right in front of him. I 

knew he would be pleased about that. 

But I am also a supporter of the democratic process, and of allowing market forces to drive financial decisions like executive compensation. But you know, the comparison that Chairman Baker 

and Mr. McHenry have made, of—with trial lawyer awards in jury 

trials versus corporate board-decided executive compensation, is—

it’s comparing apples to licorice. I mean, it’s not even oranges. 

They’re not even in the same family. 

Juries, otherwise known as people who are a part of our democratic process, and the jury process, and the decisionmaking process about jury awards and trial lawyer compensation, are all rooted 

in the law, I mean, which we can change, here, as Members of Congress, so, unlike shareholders’ ability to impact corporate board decisions on executive compensation. 

So, there is absolutely no comparison, and I think that should be 

noted publicly, and I would love to hear your comment on that. 

And also, Mr. Baker, with all due respect, I was in the State legislature in Florida during the Florida tobacco litigation, and voted 

on the law several times that allowed that litigation to go forward, 

also a part of the democratic process. 

We can note that there were 12 trial attorneys who did each make $250 million out of a $41 billion settlement. Combined, all 12 

lawyers took 7.3 percent of the total settlement that the State of 

Florida received. That is far less of a percentage than most CEO’s 

make as a total percentage of their compensation to all employees. 

And, although I can’t give you a number, as a total percentage of 

the profits that each corporation makes. So, it is a political comparison, it appears, as opposed to a fair comparison. 

And then, the last thing I would just state and ask you to comment on is in the May 3rd hearing, what the SEC chairman commented on, and what his concern was over executive compensation, 

was that often CEO’s make decisions about business deals because 

of the nature of their compensation package. The outcomes of the 

incentives that are provided in their compensation packages depend upon some of the decisions and the business deals that they 

make. And that’s a completely unfair process to shareholders, who 

have no say in either that decision about the business deal, or 

about the compensation that the CEO receives, as a result of that 

decision. 

So, that’s not the market driving that, those decisions. That is 

the compensation that, in many cases is excessive, driving that 

CEO’s decision, which is unfair to shareholders. So I just wanted 

to see what you thought about that. 

Ms. MINOW. Well, that was a very thoughtful statement. Thank 

you very much. With regard to the litigation point, I would just say 

40

that my concerns about excessive—about misaligned incentives 

with regard to litigation relate to settlements, and not to jury 

trials. And I think that that’s where the real problems are. 

But I absolutely agree with you that we have had a lot—you 

know, whoever—I forget who said this was a wide-ranging philosophical discussion, but certainly a lot of tangential topics have 

come up, and I really appreciate your distinguishing them and putting the focus back on the one we’re here to talk about. 

Mr. LEHNER. I really have nothing to add. Thank you. 

Ms. WASSERMAN-SCHULTZ. You don’t have any comment on anything I have said? 

Mr. LEHNER. No, I mean— 

Ms. WASSERMAN-SCHULTZ. No opinion? 

Mr. LEHNER. I generally agreed with what Nell said, and I probably couldn’t say it any better. I share her concern about the litigation costs, and I am not privy to some of the deals that you were 

referring to, so I really couldn’t comment on it. 

Ms. WASSERMAN-SCHULTZ. Sometimes it’s helpful just to get the 

facts on the table. Thank you, Mr. Chairman. I yield back the balance of my time, and I appreciate the consideration. 

Mr. BAKER. I thank the gentlelady. I want to thank each of you 

for your participation here. I assume, going forward, that we will 

return to this topic in the future, and we look forward to having 

you back. 

Ms. MINOW. Thank you, Mr. Chairman. 

Mr. BAKER. Our committee proceeding will now stand in recess, 

pending the four matters of business on the House Floor. 

Mr. LEHNER. Thank you. 

Mr. BAKER. We will return shortly. 

[Recess] 

Mr. BAKER. [presiding] In order to proceed, we need a Member 

on both sides for hearing purposes. And with Mr. Miller’s return, 

I am authorized to go ahead and reconvene our hearing. And I understand that there will be other Members returning as they clear 

the Floor. 

So, let me welcome the members of the second panel, and express 

to you our appreciation for your patience and willingness to hang 

in there with us. As is the case for the first panel, we ask that you 

try to conclude your remarks in 5 minutes, and we will make your 

official statement part of the record. 

And I turn first to Mr. Brandon J. Rees, who is the assistant director, office of investment, with the AFL–CIO. Please proceed as 

you choose, Mr. Rees. 

STATEMENT OF BRANDON J. REES, ASSISTANT DIRECTOR, 

OFFICE OF INVESTMENT, AFL–CIO 

Mr. REES. Thank you, Mr. Chairman. The AFL–CIO believes the 

Protection Against Executive Compensation Abuse Act is essential 

to reform CEO pay. Today, the average CEO of a major company 

makes 431 times the average worker’s pay, up from 42 times in 

1980. Executive compensation abuse takes dollars out of the pocketbooks of shareholders, including the retirement savings of America’s working families. 

41

The first problem with CEO pay is that CEO’s are being paid too 

much relative to their individual contribution. No CEO is so talented that his or her compensation should be unlimited in size. 

The second problem is that executive compensation is poorly disclosed to shareholders. Many forms of CEO pay are under-reported, 

and CEO pay-for-performance targets are hidden from shareholders. 

The third problem is that today’s executive pay packages are creating improper incentives. For example, stock options can create a 

strong incentive to fraudulently manipulate companies’ stock 

prices. That is the lesson of today’s Enron convictions. 

Earlier this year, the SEC proposed new executive pay disclosure 

rules. The Commission and its staff should be commended for this 

proposal. However, the SEC’s proposed rulemaking does not go far 

enough. Shareholders must be told what pay-for-performance targets are being established. Shareholders should also be told if directors have potential conflicts of interest. 

We believe that the investing public shares our view. Through 

the AFL–CIO’s executive pay watch Web site, nearly 20,000 individuals have commented on the SEC’s proposed rulemaking, one of 

the highest totals in the history of the SEC. 

The Protection Against Executive Compensation Abuse Act will 

go further than the SEC’s proposal in several important ways. This 

bill will require companies to disclose short- and long-term performance targets. Under this legislation, companies will be required to call back executive pay that is improperly awarded as the 

result of an accounting restatement. 

This bill will also require shareholder approval of executive compensation plans, and golden parachutes, an important safeguard 

against CEO pay abuse. 

I would like to focus on the biggest component of CEO pay that 

is hidden from shareholders: CEO golden retirements. Every American deserves a secure retirement. Yet increasingly, companies are 

terminating their employees’ pension plans, and transferring the 

risk of saving for retirement on to their workers. 

At the same time, companies have turned their executive pension 

plans into CEO wealth creation devices. As a result, many companies have a two-tier retirement system: one for the CEO, and one 

for everybody else. 

Leading the list is Exxon Mobil CEO Lee Raymond, who accrued 

an annual pension of over $8 million. On his retirement, he opted 

for a lump sum cash payment of $98 million. Meanwhile, Business 

Week has reported that Exxon’s $11.2 billion pension funding deficit is the biggest out of all U.S. corporations. 

Let me give you more examples. At Pfizer, CEO Hank McKinnell 

will receive an annual pension of $6.5 million, or a lump sum of 

over $83 million. Meanwhile, Pfizer’s stock price has fallen nearly 

50 percent under his leadership. 

United Health Group CEO Bill McGuire will receive $5 million 

a year in pension benefits. That is on top of his $1.75 billion in 

stock options, many of which were improperly back-dated to maximize their value. 

IBM CEO Sam Palmisano’s pension will be worth $4.5 million 

annually, despite IBM’s recently announced pension freeze for its 

42

workers. And Home Depot CEO, Bob Nardelli, will get $4.6 million 

each year in retirement, while his employees do not even have a 

defined benefit pension plan. 

It is outrageous that the very same CEO’s who are undermining 

the retirement security of America’s working families will receive 

CEO supersized pensions. The Protection Against Executive Compensation Abuse Act and the SEC’s proposed rulemaking on executive compensation disclosure will go a long way to expose these 

preferential executive retirement benefits. Thank you. 

[The prepared statement of Mr. Rees can be found on page 100 

of the appendix.] 

Mr. BAKER. I thank you for your testimony, sir. The next witness 

is Ms. Christianna Wood, senior investment officer, Global Public 

Equity, on behalf of the California Public Employees’ Retirement 

System. Welcome. 

STATEMENT OF CHRISTIANNA WOOD, SENIOR INVESTMENT 

OFFICER, GLOBAL PUBLIC EQUITY, ON BEHALF OF THE 

CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM 

Ms. WOOD. Thank you. Mr. Chairman, Congressman Frank, and 

members of the Committee, I am pleased to provide the perspective 

of an institutional investor on the issue of executive compensation 

and the legislation before you. 

CalPERS is the Nation’s largest pension system, with more than 

$200 billion in assets. I am here to support the legislation that 

would help investors and shareholders know how their capital is 

being used. 

We seek fuller disclosure and clearer communication about executive pay packages in simple English. We also want executive pay 

tied to performance, with clearly defined measures of success and 

failure in simple math. And we want companies to have a call-back 

policy for recapturing any form of incentive compensation that is 

unjustified. Executives should pay back incentive awards when it 

is found that the numbers used to justify the awards were inaccurate, requiring restatement. 

Too often, we are paying for failure and not for performance. Just 

this month, CalPERS urged other shareowners to support a resolution requiring Home Depot to adopt a non-binding investor vote on 

its executive pay plan. That is partly because, over the last 5 years, 

Home Depot gave its chief executive over $190 million, at the same 

time that the total stock declined 12 percent. 

This last March, shareholders sued Hewlett Packard to contest 

a severance package of more than $21 million, after the chief executive resigned for poor performance, and now we are told that the 

severance package could be worth up to $42 million, including 

stock and options. 

Opponents of today’s bill say government shouldn’t meddle in the 

marketplace that is working well, and that executive pay reflects 

honest competition for the best corporate leaders. Opponents say 

soaring executive compensation is merely keeping pace with corporate growth, and that pay packages appropriately reflect what 

the market will bear. We are told that supply and demand is what 

determines executive pay, much as it does Yankee shortstop Alex 

Rodriguez, who gets $25 million a year. 

43

However, supply and demand works better for ballplayers than 

it does for corporate executives. Baseball fans who find the price 

too high can vote with their feet; they can stay home. In the corporate world, shareowners can’t stay home. If we sell our stocks, 

we are out of the game. If we’re out of the game, we can’t produce 

the investment returns that cover $3 out of every $4 of our people’s 

retirement benefits. 

When a CEO gets millions of dollars for running a company into 

the ground, when an executive takes stealth payments that we 

can’t trace, there is a big potential impact on the retirement prospects for millions of ordinary people. We are talking about the 

clerks, the custodians, the technicians, the safety officers, and the 

public employees who entrust their nest eggs to investors like us. 

And of course, taxpayers also pay more if corporate boards fall 

asleep at the switch. Taxpayers and CalPERS members typically 

don’t attend company meetings, or even vote proxies. They rely on 

large, institutional shareowners and investors like CalPERS to 

watch their money. But we can’t follow their money in executive 

compensation, as it stands now. 

Big companies may say that they want to—excuse me, they may 

say that they pay executives a pittance, compared to the billions 

of dollars in profits that they generate. In response, we have 

learned that runaway executive compensation indicates that corporate boards aren’t minding the store. And we all know that bad 

things happen when corporate boards don’t pay attention. Boards 

weren’t paying attention on the accounting issue a few years ago, 

and they are in the same fix today, with the compensation issue. 

A few years ago investors testified here on behalf of what became 

the Sarbanes-Oxley law, which requires transparent accounting 

principles. That law has been good for the market, making it harder for the Enrons and the WorldComs of the world to cook the 

books, deceive investors, and jeopardize the life savings of millions 

of Americans. The bill before you today would bring that same kind 

of transparency and oversight to runaway executive compensation. 

In a perfect world, we wouldn’t need government to call companies to account for the way that they pay their executives. Since 

this isn’t a perfect world, we are seeking a rule of law not to set 

salaries, but to require companies to show us the money, to show 

those who own the companies what they are paying executives, and 

why. 

To sum up, we want more information than just corporate labels 

to tell us what’s in the bottle. As owners, we have the right to 

know. Our financial health and the retirement security of 1.4 million members may depend on it. Thank you, and I welcome your 

questions. 

[The prepared statement of Ms. Wood can be found on page 105 

of the appendix.] 

Mr. BAKER. Thank you for your comments. Our next witness is 

Mr. Frederic W. Cook, founding director of Frederic W. Cook & Co., 

Incorporated. Welcome, sir. 

44

STATEMENT OF FREDERIC W. COOK, FOUNDING DIRECTOR, 

FREDERIC W. COOK & CO., INC. 

Mr. COOK. Thank you, Mr. Chairman, Mr. Ranking Member, and 

members of the Committee. It’s a pleasure to be here. I will skip 

my background, except to say that I am an executive compensation 

consultant with about 33 years of experience in advising boards 

and managements on executive compensation pay issues. 

I will start by saying that the media has been flooded with a 

multitude of distorted, misleading, and often erroneous statistics 

given to portray U.S. CEO’s and board governance in a negative 

light. In assessing what’s right and wrong with executive compensation, it is important to start with a sound fact base. 

In my presentation, I will identify, and hopefully clarify, two important issues in executive compensation that have caught the 

public’s attention: the CEO pay ratio to the average worker; and 

CEO pay increases. 

It is often cited in the press that the ratio of the average large 

company CEO’s pay to the average American worker has grown 

threefold over the past decade from about 140 times to about 430 

times in 2004. The calculations behind these statistics have been 

chosen to produce high CEO pay ratios for maximum propaganda 

effect. 

First, they include realized option gains, which are the pay-off for 

many years of grants and rising stock prices. They are not representative of a single year’s compensation. 

Second, they focus on average CEO pay, not the median. Average 

pay is inflated above true compensation norms by a few outliers. 

Third, and lastly, they compare CEO pay to the average pay of 

production and non-supervisory workers who, unfortunately, have 

not benefitted from trends in the United States and global economy 

as much as other American workers. 

What might be a better way of calculating CEO pay ratios? We 

propose using the Mercer human resource consulting CEO compensation survey. This is a large, stable group of 350 companies in 

diverse industries and sizes, and the data has been collected consistently for over 10 years, since 1992. 

With funding support from the Business Roundtable, we accessed 

this database on CEO pay and asked Mercer to calculate median 

CEO pay—not average—and break it down by component: salary, 

salary and bonus, annual pay, salary and bonus, and long-term, 

which includes stock options. But we had them compute stock options on the Black Scholes grant value, not realized gain. And I 

think you all know that the Black Scholes grant value will be, as 

part of the SEC’s proposal, how options will be calculated and included in total pay, going forward. These numbers, we believe, better reflect the intention of board compensation committees in setting CEO pay levels, and in the new SEC definitions. 

For the average production worker, U.S. Census Bureau data 

provided the median annual earnings for individuals aged 25 to 64, 

who worked full-time for the full year. That’s a smaller group. This 

is more representative of the average American worker, blue collar 

and salaried, and it’s more comparable to CEO’s, who also work 

full-time and year-round. 

45

What was the result of these changes in calculation? The CEO 

pay ratio was 90 times in 1994, not 142 times, as reported by the 

pay critics, and it rose to 187 times in 2004, not 430. This is a twofold increase over the period, not three-fold, as usually reported. 

The estimated pay ratio went down in 2005, to 179 times. CEO pay 

is not always escalating upward; it does fluctuate with the market. 

The CEO pay ratio actually peaked in 2001, following the peak 

of the tech bubble. The fact that CEO pay has been trending below 

its peak level for 4 years running has not been reported in the 

press, to our knowledge. It is possible that the critics of executive 

pay levels and practices use pay statistics selectively, and only 

when it portrays CEO’s in a bad light. 

Even the Wall Street Journal reported as fact last January that 

the average CEO’s salary in the United States is 475 times greater 

than the average worker’s salary. This is patently absurd. There 

are over 15,000 CEO’s in the United States in public companies 

alone, and many more in private companies. The Wall Street Journal later corrected its errors by stating, ‘‘A Towers Perrin study 

found that the total compensation of the average chief executives 

in the United States in 2005 was 39 times the average worker.’’ 

Note the errors committed by the Wall Street Journal. They had 

used a statistic from a small sample of highly paid CEO’s in very 

large companies, and they made the reader believe that all CEO’s 

are overpaid. And they took the CEOs’ total pay and called it base 

salary, having you believe that CEO pay is not at risk or variable 

with performance. 

There is other material in my presentation, but my light is red, 

so I will cede the floor. 

[The prepared statement of Mr. Cook can be found on page 66 

of the appendix.] 

Mr. BAKER. I thank the gentleman for your testimony. And let 

me start, Mr. Cook, with your observations about this apparent cycling of CEO compensation, in that along with the tech bubble, we 

appear to have hit a bubble in compensation in 2001. And in your 

view, from that point forward, speaking to the median, that there 

has been a slight decrease, and certainly not an increase in compensation levels, in respect to the 2001 figure. 

Do you have an opinion as to the proposal now pending before 

the SEC on additional disclosure? And do you believe that to be a 

helpful proposal, moving in the right direction? 

Mr. COOK. Yes, sir. I do have an opinion. I do believe it is a helpful proposal. We are in favor of enhanced disclosure, particularly 

of retirement benefits and perquisites that have been under-reported in the past. The—we favor the whole proposal. 

The inclusion of Black Scholes option grant values in the total 

compensation will, in fact, confuse things a bit, because what you 

are doing is combining compensation that has been received, like 

salaries and bonuses, with compensation that is only potential, 

they may never receive, and may be worth a lot more. But I’m not 

sure there is a better answer to it. So we favor the approach that 

they’re proposing, yes sir. 

Mr. BAKER. Thank you. Ms. Wood, I know you made reference to 

the proposal. I assume you have additional requirements you would 

like to see the SEC consider as it moves forward? 

46

Ms. WOOD. There are very few modifications that we are suggesting to the SEC. We have provided a comment letter to the 

SEC, and have very minor suggestions. In general, we are very 

supportive of the rule. 

Mr. BAKER. And Mr. Rees, did you have some comment on the 

SEC rule? 

Mr. REES. Yes, sir. As I said in my testimony, we believe the 

SEC should mandate pay-for-performance targets disclosure for 

CEO’s. We believe that is information that shareholders have a 

right to, and that will help correct the inequities and imbalances 

in executive compensation. 

We also believe that the SEC should retain or lower the disclosure threshold for directors’ related party transactions. The SEC is 

proposing doubling the amount of business that the director could 

do with the company from $60,000 to $120,000. And we believe 

that that’s just not right, that those types of transactions must be 

disclosed, in order to prevent conflicts of interest and self-dealing 

in the executive compensation process. 

Mr. BAKER. Thank you. Mr. Cook, with regard to those outliers 

that are creating the basis for much of the public criticism on CEO 

compensation, I am concerned that much of the shareholders’ interests are actually voted by large institutional investor pension fund 

groups. And there does not appear to be adequate disclosure in advance of how those large blocks may be voting. 

Is there any nexus between the shareholder expression of discontent, institutional block voting of large investor groups, and any 

potential reform there, that might help to get at these abhorrent 

actors? Certainly I’m not suggesting Mr. Frank’s bill goes to the 

point of having shareholders approve compensation, I’m not going 

quite there. But shareholders can deliver messages in a number of 

ways. What can we do about those outliers, and does that offer any 

potential for us? 

Mr. COOK. Well, I think, sir, that that is already underway somewhat. CalPERS, I believe, will notify a company and ask to meet 

with them, and explain their compensation program with a view 

that if you don’t like the response that you receive, you will withhold votes from directors, or put them up on the abuse list. 

So, the idea of institutional shareholders expressing their will beforehand, I think, is a reasonable idea and is underway. 

Mr. BAKER. Well, in that light, then, if what the additional disclosures, which will be made available under the implementation 

of the SEC rule, with market forces using that information appropriately, Ms. Wood, don’t you think that gets us where we need to 

be, if you, as a CalPERS representative expressed to the board of 

a company that you find dissatisfaction with their practices? 

Ms. WOOD. We own 7,000 companies worldwide, and let me say 

that we—it would be virtually impossible to engage all of them to 

find out the kind of detail we would need, in order to withhold a 

vote in an extreme circumstance. 

Mr. BAKER. Thank you. My time has long expired. I have been 

given this order for recognition. Mr. Sherman? 

Mr. SHERMAN. Thank you. I will try to use my 5 minutes the best 

way I can. I am surprised, first, that these hearings are focusing 

exclusively on executive compensation. We ought to be doing more 

47

to give investors the information they need, and that information 

needs to be definitive and audited and, in some cases, industry specific. 

And I will use these hearings as a chance to once again say that 

we need a lot more information than we are getting in the financial 

statements which, after all, only include the information thought 

relevant by investors over 150 years ago. The income statement, 

the balance sheet are the same documents as the horse and buggy 

era. Oh, we’ve got a funds flow statement, but that’s just the same 

information shuffled differently. 

We need to know what the backlog is of a major manufacturer, 

what the employee turnover rate is, what the same store sales are, 

month after month or year after year, from a major retailer. And 

we need a system in which these and many other terms have a specific, clear, universal definition, that they are reported periodically, 

and that that information is audited. 

But since all we are talking about here is executive compensation, let me say that we have to get away from this bizarre cult 

of the CEO. To say that whether the Miami Heat win the playoffs 

depends upon Shaq is mostly true. To say that whether a Buick 

works depends to the same degree on the chairman of General Motors is to ignore the hard work, dedication, and skill of tens of hundreds of thousands of GM employees. 

It is simply absurd to say that the whole up or down in a company’s stock is dependent upon the CEO, and that a huge share of 

that up of any increase should go to the CEO. 

We shouldn’t be looking at just the fluctuation in the rate of pay 

of CEO’s, it does go up or down. But we should note—and this is 

similar to what the third witness had to say, a little differently—

that for the top 100 U.S. companies, it’s 170 times the average 

worker. Now, if you have—go to smaller companies, you get a 

somewhat smaller number. But compare that to Britain, where it’s 

22 times, Japan, where it’s 11 times, the fact that it may fluctuate 

from 170 up to 190 and down to 150 masks the overall, which is 

that we pay our CEO’s rather well. 

This is—those who question this pay, though, give us this relatively absurd pay-for-performance idea. Sounds great. But look at 

what that does to how we run our companies. We are now going 

to say, ‘‘Produce the way Shaq does. It’s one series, seven games. 

There is no tomorrow, Shaq.’’ We want to say that to our CEO’s? 

Do we want to say it’s all about one quarter, or at most, one season? We should say that to our basketball teams; I’m not sure that 

that’s the message we want to get across. 

I would rather have a board of directors look at how the CEO 

is performing. Maybe he is doing a great job and they’re in a bad 

industry. You know, if you’re running a gold mining company these 

days, you could be dumber than a pound of gold and you would still 

be counted as a great CEO. It’s absolutely absurd to have a formula-driven—short-term formula-driven—pay package for CEO’s. 

But in order to have the board of directors determine that compensation, wouldn’t it be nice if we had democracy? Tom may have 

called it, what, excessive democracy. What about a situation—now, 

look at the situation now. You can’t run for the board of directors 

48

unless you’re nominated by the nomination committee. I think, if 

that’s a good system, let’s bring it into politics. 

‘‘Why in the hell is somebody running against me on the November ballot? The committee didn’t put his name on the ballot.’’ If we 

just had the Sherman for Congress committee determine who could 

be on the ballot, that would be the end of excessive democracy in 

the 27th Congressional District. 

How about a system where it’s a lot easier to run and a lot easier 

to get your information into the hands of shareholders? How about 

a situation where the re-election rate for boards of directors is at 

least as low as it is for Members of Congress? You know, we get 

criticized, we get re-elected, what, 96, 97 percent? Would that the 

directors only get re-elected 96 percent of the time. We would have 

some democracy. 

So I look—and the final point I want to make is Democrats have 

tended to be wary of national standards, particularly, for example, 

in the lending area. If we don’t have national standards for the protection of minority shareholder rights, for the protection of shareholder democracy, then Wyoming and Nevada and Delaware can 

lead a race to the bottom that will go lower than the bottom. And 

we will end up with nothing but a take it or leave it approach. If 

you don’t like how the company is run, you can’t vote for a new 

board of directors, so you’re stuck. 

But that means that if you don’t like the board of directors at 

General Motors, you have to sell short its hundreds of thousands 

of hard-working employees. How dare you turn to the American 

people and say, ‘‘You can’t invest in the hard work of a group of 

50,000 or 100,000 hard working Americans if you don’t like the 

board, and you can’t vote one way or the other against the board.’’ 

We need a system of national standards protecting shareholder 

democracy. And if we leave it to each State fighting for the right 

to have the most protection for the existing CEO’s, then from time 

to time, companies will change their corporate domicile from Nevada to Delaware and back again, and— 

Mr. BAKER. Your time has expired. 

Mr. SHERMAN.—we will thereby avoid excessive democracy. I 

apologize for not framing a question for the witnesses, and I yield 

back. 

Mr. BAKER. I thank the gentleman. 

Mr. FRANK. Would the gentleman yield just for 10 seconds, so we 

don’t misquote the witness? The phrase I heard from our witness 

was super-democratize. We were told not to super-democratize. 

Mr. SHERMAN. That would be the right phrase, yes. 

Mr. BAKER. Ms. Hooley? 

Ms. HOOLEY. Thank you, Mr. Chairman. I have a question for 

any of the panel members. As we—hopefully, the adoption of new 

rules with more transparency, how is it going to work that it’s 

going to be audited? How are we going to know that they really are 

transparent in their figures and their numbers? 

And the second question is, should we even have options for the 

top executives, if that confuses the issue? 

And third, how do we look at—how do we make compensation 

committees not have a conflict of interest? I mean, so often it is—

even if you say there has to be some separation, it seems like there 

49

is still a very cozy relationship where, you know, I have you over 

to my house, or I fly your wife in my plane, or there seems to be 

some connection, even if you aren’t serving on one another’s boards. 

So, how do we get some—in the compensation committees, how 

do we get some independence for those committees? Any one of the 

panel members, or all of you. Yes? 

Mr. REES. I would be happy to respond on those points. First, on 

the question of how can we ensure that proxy statement disclosure 

on executive pay is accurate, the SEC is considering in its rulemaking whether the compensation discussion and analysis portion 

of the proxies should be filed under Sarbanes-Oxley and certified 

by company CEO’s, or furnished, meaning simply provided without 

that higher standard. 

The AFL–CIO strongly believes that the CEO pay disclosure 

should be filed and subject to the higher disclosure standard. 

Secondly, on the question of stock options, we believe that companies should be paid using performance shares, actual shares of 

stock, that would only vest meeting a performance benchmark, 

combining the goal of ownership with performance. The problem 

with stock options is that they can be back-dated, as we have seen 

at companies like United Health and two dozen other companies 

that are investigated by the SEC. They can also reward share price 

volatility, which is a measure of stockholder risk. 

Lastly, on the question of how can we make compensation committees more independent and provide vigorous oversight of CEO’s, 

that’s why we need, as the Executive Compensation Abuse Act has 

proposed, shareholder approval of executive compensation plans as 

a safeguard for shareholders. 

And then, secondly, as Nell Minow proposed in the earlier panel, 

we need director election reform. We need to require that compensation committee directors receive a majority vote, and we also 

need to empower shareholders to be able to nominate their own director candidates in what’s known as equal access to the proxy. 

Ms. HOOLEY. The rest of you? 

Ms. WOOD. Several points. First, on the point of audit, this is 

desperately needed. And the back-dating of stock options is a very 

timely item in the newspaper to remind us that the audit of compensation practices is currently quite poor. 

And this is—it gets to the heart of, also, why section 404 of Sarbanes-Oxley is so important. If there was ever an item to demonstrate the need for companies to have better financial controls 

and internal controls, this would be the item. 

In terms of stock options, there is a decline in the use of stock 

options, and in preference for restricted shares, performance 

shares, etc. And that has come about as a result of the implementation of the stock option expensing. And in general, I think this 

is probably a good thing, but it demonstrates that there are many 

different ways to incent and award executives. Stock options is just 

one way to do it. And many companies are finding other methods. 

And actually, Mr. Cook is an expert on that, so I will let him opine 

on the plethora of ways in which boards give money to executives. 

On the conflicts issue, we are very concerned about conflicts on 

comp committees. We think that the standards for dependence 

need to be raised. We think that situations like Home Depot, where 

50

five of the six comp committee members are either sitting or retired CEO’s, and the correlation of that to oversized pay needs to 

go away, and that, frankly, investors need to have more say in the 

composition of those committees. Absent majority voting, it’s not 

likely that investors will ever get that right to really weigh in on 

directors, themselves. 

And I entirely agree with Mr. Rees on director election reform. 

Until we have that, really there is no teeth for shareowners in 

many of these initiatives. Thank you. 

Ms. HOOLEY. Mr. Cook? 

Mr. COOK. Well, we have had a lot of unanimity among our panelists today, let’s try and stir things up a little. 

Ms. HOOLEY. Good. Okay. 

Mr. COOK. You know, Ms. Minow, who is not here now—but if 

she was, I would still say—CEO’s don’t select the members of the 

compensation committee, not in any committee or board that I 

know of. They are all independent, and they are chosen by the 

nominating committee of the board, without input from the CEO. 

They are independent of the CEO. 

Second, stock options are a great incentive vehicle. They are perhaps the greatest derivative instrument ever invented by man to 

align the interests of the employees with the shareholders who own 

the company but do not manage the company. 

Okay, can they be abused? Sure, they can be abused. They can 

be abused by making them too big, and they can be abused by 

back-dating them, which is a—if it isn’t illegal, it should be. It’s an 

immoral act, it’s fraudulent, and it’s robbery. Okay, that doesn’t 

make you ban them. They have a role in many companies’ compensation programs, and should be encouraged. 

Now, Mr. Rees’s point about the SEC taking the compensation 

committee report, they want to take it away from the compensation 

committee and give it—and make it the responsibility of the CEO 

and the CFO, both of whom are excluded from the compensation 

committee executive sessions. In any comp committee that I attend, 

the CFO is never in there. So how can the CFO affirm to the accuracy of the committee’s report, which won’t even be the responsibility of the committee? 

If you want to make the committee independent, which we all do, 

let them keep the report under their signature, not under the signature of the CEO. Thank you. 

Ms. HOOLEY. Thank you. 

Mr. BAKER. The gentlelady’s time has expired. Mr. Frank? 

Mr. FRANK. Mr. Cook, under the current practice, how much influence does the CEO have over the selection of members—people 

to be members of the board? 

Mr. COOK. Sir, in honesty, I don’t know. I advise compensation 

committees— 

Mr. FRANK. Okay, if you don’t know, then we could move on. 

Mr. COOK. I don’t— 

Mr. FRANK. But here is what I would say, is this. The fact that 

the CEO may not pick the particular members of the compensation 

committee wouldn’t impress me if he or she has picked the pool 

from which they come. So, if I picked eight people, and three of 

51

them are going to be in the compensation committee, I don’t much 

care which three it is. 

And I appreciate that you don’t know. I will tell you that the information we have is that CEO’s have a lot of influence over who 

picks the compensation committee. I mean, I am just reading about 

Disney now, when Mike Eisner got people kicked off the board. 

So, I think the problem is that while it may be the case that the 

CEO’s don’t pick which of their directors are the members of the 

compensation committee, they have created the pool out of which 

they come. 

The second question is I agree with options, particularly with regard to mid-level and over-level employees and workers, though I 

do want to again say, we were told that if we required companies 

to expense the stock options, the heavens would fall. We have done 

so. I saw heaven last night, it was still up there. I think this is 

one more case of alarmism. 

But here is the question. For the CEO, say that I am a CEO and 

I am making $6 million a year. And I’ve got a nice driver and a 

car, and I’ve got a pretty good set of compensations. Why in the 

world does somebody then have to do more to get me to align my 

interests with the company? 

I must say, it seems to me that you’re describing a character 

flaw. I am the CEO of a company. I have got pride of craft. I really 

care about this company. I am getting a lot of money. Do we really 

need to then give them stock options in addition, to get them to do 

the job for which they are so highly paid? 

Mr. COOK. Well, I will try and answer it quickly. If we have a 

target compensation package of $6 million, let’s say, that’s— 

Mr. FRANK. No, I am asking—please don’t reframe my question. 

Suppose I’ve got a salary of ‘‘X’’ million, whatever it is, why do I 

need an incentive on top of whatever the salary is? 

Mr. COOK. To align your interests with those of the shareholders— 

Mr. FRANK. So, in other words— 

Mr. COOK.—rising stock prices. 

Mr. FRANK. In other words, you are making a stronger condemnation of CEO’s than any I have heard from some of the most 

radical people. These highly paid influential people are not, on 

their own, going to align their interests with the stockholders, unless we give them extra money on top to do that. And I am appalled by that. 

I don’t know about you, but I don’t get an extra amount to align 

my interests with the voters and the taxpayers. The cab driver 

doesn’t get an extra amount to get me where I’m trying to go. I 

mean, this notion that you have to bribe these people to do the job 

for which they are paid in the first place troubles me. 

I mean, without stock options, if we are paying someone several 

million dollars a year, we can’t count on her to consider herself 

aligned with the people who are paying her salary? 

Mr. COOK. Stock options are included in the $6 million or $7 million— 

Mr. FRANK. I’m saying if they are not. Why do you keep doing 

that? I’m saying can you not envision a situation in which there is 

52

a flat salary of ‘‘X’’ million dollars, and that should be enough so 

you don’t have to give options to them? 

Mr. COOK. No client of mine, no public company in their right mind, would pay their CEO $6 million in salary and let it go at 

that. 

Mr. FRANK. Well, I—why do you have to incentivize them to do 

what they’re getting paid to do in the first place? 

Mr. COOK. It’s called ‘‘align their interest’’— 

Mr. FRANK. No, why do you have to do that? I know what it’s 

called. You’re not a dictionary. 

Mr. COOK. Because they’re not an owner, they’re an employee. 

Mr. FRANK. Oh, the CEO is just another employee. Well, again, 

you have made the sharpest condemnation of CEO’s, that the most 

highly paid and the most powerful people in the company have to 

be incentivized to do their job. 

Let me ask—you’re a major investor. I was somewhat surprised 

to have the Business Roundtable tell me that shareholders who are 

dissatisfied have one option, as far as he’s concerned, which is to 

sell the stock. As someone who has stock in a lot of operations, how 

would that affect what you do? What would—if, every time you 

were dissatisfied with a particular set of corporations, if your only 

recourse was to sell the stock, what effect would that have on your 

ability to produce for your—for the people with whose interests you 

are relying? 

Do you get a lot of options, by the way? Ms. Wood, do you get 

a lot of options? 

Ms. WOOD. I have no options. 

Mr. FRANK. Well, do you screw your people that you work for? 

Or do you align yourself with them? I mean, are you some special 

kind of person who doesn’t need to be paid extra to align yourself? 

Ms. WOOD. I enjoy working on behalf of the 1.4— 

Mr. FRANK. Well, I wish more CEO’s were like you. But please 

go ahead. 

Ms. WOOD. Your question, I think, is very important. I have over 

25 years of investment management experience, and a number of 

designations that give me the ability to say that it would be 

against our fiduciary duty to sell those securities and just walk 

away. We would lose our voice, and we would impair the returns 

of the fund. 

Ultimately, that burden would fall on the taxpayers. And as I 

said in my statement, three out of every four dollars of the benefits 

that we pay to our members come from the investment returns. 

They don’t come from the taxpayers, they don’t come from the employees that pay into the system; they come from the investment 

returns. It is our duty to manage that money, and that is why we 

are a permanent owner, and selling stocks as a result of these 

types of situations is not an option. 

Mr. FRANK. Thank you. Let me just ask one more, if I could, if 

that’s an all—the owners of stock being told, ‘‘If you don’t like it, 

sell it,’’ what about workers who have 401(k) or other plans in 

which they were—and we may be changing that in the future—required to put some of their money into company stock? 

Are there workers who are, in effect, sort of captives of the company stock? What would their recourse be, if they were unhappy 

53

with corporate governance? Can everyone sell their stock freely, or 

did they make a free choice to buy it in the first place? 

Mr. REES. Well, the problem is that if I wanted to screen the 

companies that I invested in, based on those that paid reasonable 

compensation, I would have a very difficult time finding enough 

companies to get a diversified portfolio. 

The problem is that this is a systematic problem of executive compensation, and that, on average, whether you think it’s $6 million or $12 million, it’s too high. And the practices that have resulted in these levels of compensation are—need to be reformed. 

And that’s why we need greater accountability. 

Mr. FRANK. This last question, there was some reference to union 

leaders’ pay. How many union leaders get sort of incentive pay so 

they will do their job right? Are you familiar with the number? 

Mr. REES. The—it’s an interesting fact that every single employee of a union’s compensation is disclosed at the Department of 

Labor. And yet, CEO’s are arguing over whether the top five employees of a company should disclose their compensation or not. 

And if you go to the AFL–CIO’s Web site at— 

Mr. FRANK. But is it common to give them whatever the equivalent of options would be? I mean, do they get— 

Mr. REES. We get no options. 

Mr. FRANK. In other words, let me put it this way. If you’re a 

union leader, and you sign up more members, do you get a percentage of the dues to incentivize you to align yourself with the people? 

Mr. REES. No, we do— 

Mr. FRANK. Okay. 

Mr. REES. We represent working families, because we believe it— 

Mr. FRANK. Well, I appreciate that. I guess what I am—I must 

say that I am disturbed to be told that there is—if one group of 

American CEO’s who peculiarly have to be given extra incentive to 

do their job—and the fact that they are hired and highly compensated and highly respected is apparently not enough to get 

them to align themselves with the people they’re working for. 

Thank you, Mr. Chairman. 

Mr. BAKER. Mr. Miller? 

Mr. MILLER. Thank you, Mr. Chairman. Just a couple of questions. It’s late, and the TV cameras are gone. I think we’re all tired. 

There have been—there was a lot of discussion earlier today in 

the first panel from the other side of the aisle about how those of 

us who are questioning CEO compensation just do not respect adequately the capitalist system, and the wealth that’s being built. 

And the example that was being given repeatedly was Bill Gates 

and Microsoft. 

You referred, Mr. Cook, to the CEO as an employee. My understanding of the source of Mr. Gates’s wealth is the equity he owns 

in Microsoft, not his compensation as the executive of Microsoft. Is 

that correct? 

Mr. COOK. That’s correct. Mr. Gates never got a salary, I don’t think, of more than $500,000 and a bonus of around the same 

amount. I don’t think he ever got a stock option in his company. 

He was a founder. When we use the term CEO in these discussions, I think we are talking about a professional employee who did 

not found the company, who came in— 

54

Mr. MILLER. So the story of Microsoft and Bill Gates is not pertinent to this discussion? 

Mr. COOK. Yes, sir. 

Mr. MILLER. That was what I thought, too. A couple of other 

points. In the earlier panel, there was a remarkable difference between Ms. Minow, who agreed with a USA Today study of 2004, 

and Mr. Lehner—I got it right this time, I apologize for getting it 

wrong earlier—apparently looking at exactly the same documents 

filed with the SEC by exactly the same people, at exactly the same 

time. 

And Ms. Minow and USA Today concluded that the median com- pensation in 2004 for the CEO’s of public corporations was $14 million, and Business Roundtable concluded that it was $7 million. 

And both of them said, basically, that there were some elements of 

compensation that were kind of hard to value. 

Now, we have talked about the need for transparency, and everyone seems to agree with that. But not being able to tell whether 

the compensation is $7 million or $14 million strikes me as a pretty 

big problem with transparency. 

Mr. Cook, is that—do you think that difference is largely due to 

the transparency issues? 

Mr. COOK. No, sir. I don’t think it’s due to the transparency issue 

at all. I think it’s a difference between counting option gains when 

they’re realized, versus counting the Black Scholes value when 

they’re granted. 

I think—I don’t know, because I didn’t see it—but I know that 

Ms. Minow at Corporate Library counts realized option gains, and 

that’s where they come up with their number. And I think that’s 

what the USA Today report should do. I think that’s a very anomalous thing, because it takes many years of grants and lumps them 

into one year, and it also makes it subject to the rising market. 

If we have a good stock market for the rest of this year, then the 

proxy statement next year may show higher increases in pay, just 

because executives chose to exercise their options from a long time 

ago this year. 

Mr. MILLER. Well, according to Ms. Minow’s study and the USA 

Today study—first of all, that was median. They didn’t use the average. Ms. Minow said the average for that year, the average increase, was not a 1 percent, because there were 27 outliers that 

had increases of 1,000 percent. 

But based upon their earlier—it had gone up more between 

2003—than between 2002 and 2003 and 2001 and 2002. And immediately after Enron and WorldCom, it slacked back off to about 9 

percent, and then it went up to a 15 percent increase, and then to 

a 30 percent increase. But increases that are substantially above 

what most Americans are getting is the norm, not a 1-year anomaly. 

Mr. COOK. I can explain that. The Corporate Library uses a very 

large database, about 3,000 companies that comprise the Russell 

3,000, okay? They compute using stock option realized gains. And 

they do compute the median, that’s what they focus on. They agree 

with us, that median is better than average. 

The median, under their database, went up 15 percent in 2003— 

Mr. MILLER. Right. 

55

Mr. COOK.—30 percent in 2004, and 11 percent on their preliminary data of 500 companies in 2005. They hadn’t completed their 

full research yet. That uses realized option gains. 

We had been in a period of rising stock prices since the collapse 

of the tech bubble in 2000 and 2001. That’s what is showing that 

up. They have a very large database, and they just computed using 

realized gains. This problem, I think, will disappear next year, 

when the SEC new rules go in requiring Black Scholes values, because I think everybody will shift to the Black Scholes value. 

Mr. MILLER. Okay. One last question; I think the red light is 

about to go on. There has been some discussion about the need for 

an independent—for having compensation committees all be independent directors. And I questioned earlier what we mean by independent. 

Independent does not mean—tough-minded skeptics, it won’t 

mean people who are going to take the CEO by the lapels, and 

challenge them. It means simply people who do not have certain legally-defined relationships. 

And the criticism of many, including, I think, Ms. Wood and Mr. 

Rees, is that they are not independent enough. Ms. Wood, do you 

believe that the compensation committees are sufficiently independent? And if not, how do we make them more independent? 

How do we make them more—how do we make them live up to 

their duty to the shareholders, to the owners, and not to the 

CEO’s? And Mr. Rees, the same question to you, sir. 

Ms. WOOD. Well, first of all, many of them reach the technical 

definition of independence. And you know, I mean, it is the case 

that—and I will just use Home Depot as an example. You know, 

there are relationships among the boards of these—it’s been well 

documented. But they all reach a technical definition of independence. 

And let me get to the second part of your question, which is how 

do we create more responsive compensation committees, more responsive to the needs of the shareowner, and the voice of the 

shareowner? I think there are a couple of things that can be done. 

One is, first of all, for shareowners to use the very blunt tool of 

withholding their vote, which is unfortunate, because that’s the 

only tool we have right now. 

Second is to go down the path of the UK model, where 

shareowners get an up or down vote to approve the compensation 

committee report, and as a result, make a statement about the 

compensation of the company. 

And barring that, I think the only other thing is more election 

reform, and more majority vote proposals, such as I understand the 

majority vote proposal passed at Home Depot, for example. 

So, it is possible that, you know, if a majority of shareowners 

were to say—were to withhold their vote from a compensation committee chair at Home Depot, that next year it’s very likely, if the 

majority vote were implemented, that that person couldn’t be on 

the board any more, or that person would have to submit their resignation to the nominating committee, and that that person should 

get the message that they need to lead the board, that they haven’t 

acted on behalf—in the best interest of shareowners. 

56

So there are a couple of things—there are a few things we can 

do, I think, to strengthen the voice of the owners. 

Mr. FRANK. Was that a binding vote by Home Depot, or an advisory vote? You said a majority vote passed at Home Depot, was 

that binding or advisory? 

Ms. WOOD. I believe it was not binding. Am I correct? 

Mr. REES. That’s correct. 

Ms. WOOD. Yes. 

Mr. REES. And if I could just add to your point about disclosure, 

the numbers that are publicized and the numbers that are disclosed to shareholders, and the methodologies that Mr. Cook was 

referring to, all of those exclude what is perhaps the single biggest 

component of CEO pay. 

Professor Lucien Bebchuk at Harvard Law School has estimated 

that the typical CEO receives over one-third of their total compensation in the form of retirement benefits. CEO’s are receiving 

supersized pensions that have preferential terms that are not offered to other workers. And I think that’s unconscionable, particularly at a time when companies are terminating their pension 

plans and returning them back to the government through bankruptcy. 

Mr. FRANK. So we’re aligning their interest with the workers 

once they have retirement? Maybe we’re aligning their interests 

with their wives. 

Mr. REES. Someone made the point that CEO turnover has increased over the years to just 4 years in office. And I would suggest 

that may be because we are paying them too much, and they have 

no more reason to work. 

Mr. FRANK. They— 

Mr. REES. They would rather retire to an island in the Caribbean, or to a ski slope in Aspen. 

Mr. BAKER. And with that word, the gentleman’s time has expired. Mr. Miller? 

Mr. MILLER. Just one last point on the relatively short tenure of 

many CEO’s. We have discussed the need for a longer-term view 

by CEO’s, and at the same time pointed to four-and-a-half year average tenure, as evidence that they are being held accountable. 

In fact, those seem to push us in different directions, that if 

they’re going to be judged by a standard that is that immediate, 

and their compensation is based on how they’re doing right now, 

it is certainly going in a different direction from what Mr. Lehner 

suggested the Business Roundtable’s position was, that they needed to be pushed toward a long-term view of how the corporation is 

doing. 

Mr. BAKER. And I think, not to raise a new subject, but we ought 

to get away from quarterly earnings reports and talking heads impacting Wall Street, saying— 

Mr. FRANK. Yes. 

Mr. BAKER.—CEO ‘‘X’’ didn’t meet Wall Street expectations, his 

stock goes in the tank, he gets fired, and it serves no one’s economic interests. 

Mr. FRANK. Or, let me say even worse, when I read in the paper 

that their stock went down because they only met expectations. 

Mr. BAKER. Yes. 

57

Mr. FRANK. And they’re expected to exceed expectations, which 

isn’t good English, and certainly isn’t good corporate governance. 

Mr. BAKER. I would even go so far as to say there might be people who utilize financial tools to meet expectations or exceed them 

when the economic reality was not the same. 

And so I think we’ve got a lot of homework here to do, and I 

want to— 

Mr. MILLER. Mr. Baker? 

Mr. BAKER. Yes. 

Mr. MILLER. I can’t help but notice that you waited to criticize 

the TV talking heads until after the Bloomberg and the— 

Mr. BAKER. Oh, I will do it all the time. I have no— 

Mr. MILLER.—cameras have left. 

Mr. BAKER. I want to thank each of you for your participation. 

We will return, I’m sure, to the subject in future meetings. And Mr. 

Frank? 

Mr. FRANK. Yes, I just wanted to particularly express my appreciation for waiting. But we’ve taken this seriously, and there were 

members here, and what you’ve said is heavy in its impact. 

So, we appreciate you being here, and it wasn’t wasted time, although we apologize for the delay. 

Mr. BAKER. Thank you again. Our meeting stands adjourned. 

[Whereupon, at 4:43 p.m., the committee was adjourned.] 

(59)

A P P E N D I X

May 25, 2006

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