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COMPENSATION STRUCTURE AND SYSTEMIC RISK 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JUNE 11, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–42 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

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 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

June 11, 2009 .................................................................................................... 1 

Appendix: 

June 11, 2009 .................................................................................................... 69 

WITNESSES 

THURSDAY, JUNE 11, 2009 

Alvarez, Scott G., General Counsel, Board of Governors of the Federal Reserve System ......................................................................................................... 14 

Bebchuk, Lucien A., William J. Friedman and Alicia Townsend Friedman 

Professor of Law, Economics, and Finance, and Director, Corporate Governance Program, Harvard Law School ................................................................... 43 

Breheny, Brian V., Deputy Director, Division of Corporation Finance, U.S. 

Securities and Exchange Commission ................................................................ 15 

Minow, Nell, Editor and Founder, The Corporate Library .................................. 41 

Murphy, Kevin J., Kenneth L. Trefftzs Chair in Finance, University of Southern California, Marshall School of Business ...................................................... 46 

Sperling, Gene, Counselor to the Secretary of the Treasury, U.S. Department 

of the Treasury ..................................................................................................... 12 

Turner, Lynn E., former Chief Accountant, U.S. Securities and Exchange 

Commission ........................................................................................................... 44 

Verret, J.W., Assistant Professor, George Mason University School of Law ...... 47 

APPENDIX 

Prepared statements: 

Carson, Hon. Andre .......................................................................................... 70 

McCarthy, Hon. Carolyn .................................................................................. 71 

Price, Hon. Tom ................................................................................................ 72 

Speier, Hon. Jackie ........................................................................................... 73 

Wilson, Hon. Charlie ........................................................................................ 77 

Alvarez, Scott G. ............................................................................................... 78 

Bebchuk, Lucien A. .......................................................................................... 92 

Breheny, Brian V. ............................................................................................. 148 

Minow, Nell ....................................................................................................... 161 

Murphy, Kevin J. .............................................................................................. 169 

Sperling, Gene .................................................................................................. 183 

Turner, Lynn E. ................................................................................................ 188 

Verret, J.W. ....................................................................................................... 209 

(1) 

COMPENSATION STRUCTURE AND 

SYSTEMIC RISK 

Thursday, June 11, 2009 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Waters, Maloney, 

Watt, Sherman, Moore of Kansas, Capuano, Hinojosa, Clay, McCarthy of New York, Scott, Green, Cleaver, Ellison, Klein, Wilson, 

Perlmutter, Carson, Speier, Adler, Driehaus, Kosmas, Grayson, 

Peters; Bachus, Castle, Royce, Biggert, Hensarling, Garrett, Barrett, Neugebauer, McHenry, Campbell, Bachmann, Marchant, 

McCarthy of California, Posey, Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. 

I am told that the Ranking Republican is on his way, so we will 

begin. We are going to have 30 minutes of opening statements, by 

agreement between the two sides, and I will begin. 

First, I want to make a very important distinction that doesn’t 

always get made. We are not here today talking about the pay restrictions that apply to recipients of TARP money. There is a separate set of considerations there. We are talking about entities 

which received capital infusions from the Federal Government. 

This hearing today is looking forward as to whether or not there 

should be bills enacted that deal with compensation without regard 

to whether or not people have taken TARP money going forward. 

I believe that it is now clear, and I am reinforcing that by a number of authorities—Paul Volcker for example, Chairman Bernanke, 

people in the British Financial Services Authority—that the problem with compensation is that it has encouraged excessive risk-taking. That is, once we leave the area of the recipients of TARP 

money, it is not any part of my concern as to the dollar amounts 

that were given, from the governmental standpoint. We are not 

talking here about amounts. We are talking about the structure of 

compensation. 

And I believe that the structure of compensation has been 

flawed. Namely, we have had a system of compensation for top decisionmakers in which they are very well rewarded if they take a 

risk that pays off but suffer no penalty if they take a risk that costs 

the company money. 

Now, risk is a very important part of this business, and we are 

not trying to discourage people from taking risk. That is not the 

2 

government’s job. But it should not be a system in which risk is 

artificially encouraged, in which excessive risk-taking takes place. 

Now, I said, and I should correct myself before someone else 

does, that we weren’t talking about dollar amounts. We are in one 

sense; I do think there is a problem with the overall compensation, 

but it is not one the government should try to solve in any specific 

way. 

What we do instead here is, to borrow from our English neighbors and competitors, because people say you can have a competitive disadvantage, the system known as say-on-pay in which shareholders are empowered to vote. A number of my friends are great 

supporters of shareholder democracy until we try to implement it 

and say that the shareholders, the owners of the company, should 

vote. No, shareholders should not be running a company day-today; that is why you have a board of directors. But I think the evidence is overwhelming, as is the logic. 

The relationship between boards of directors and CEOs is of necessity a fairly intimate, ongoing one. They have selected each 

other. They work together. It simply doesn’t work to say that on 

1 or 2 days a year, this group who works so closely together will 

now assume the arm’s length positions of labor and management 

and bargain with each other as if there was that independence. 

Therefore, this is an exception to the normal rule, it seems to me, 

where shareholders ought to have a role. Boards of directors and 

CEOs are not going to be able to do that, I think, entirely by themselves. say-on-pay empowers the shareholders, and that is where 

any questions about amount would come in. 

But what we should do now is deal with the structure, which 

should diminish the extent to which people get these incentives. I 

must say, I am somewhat puzzled when some of the most influential, highly-paid people in this country who represent very important institutions come to me and say they need these bonuses to 

align their interest with those of the company. Why a CEO of a 

major bank or investment firm does not already consider his or her 

interest aligned with the company is a strange one. They are apparently implicitly pleading to some contractor flaw that says, unlike the rest of us, they need to be specially incentivized to treat 

their employee’s interest fairly. Most of us in this society are able 

to go home without that. 

That is up to them and their shareholders, but it should not be 

done in a way that incentivizes too much risk. And I think it is irrefutable that it has happened in the past. 

I do differ with the Administration in that hope springs eternal. 

And that position seems to be that, if we strengthen the compensation committees, we will do better. I agree with what they are trying to achieve there. I agree with their statement of goals. I have 

less confidence than they do that we will be able to find compensation committees among these boards that will have that independence. So I would go somewhat further. 

But we do agree on the goals, and we do agree with the Administration on say-on-pay. And I would simply say this is the first in 

a set of hearings that will lead this committee, I hope, to begin 

marking-up in a month a set of financial regulations that I hope 

we will have to the Floor of the House before we adjourn for the 

3 

summer that will put in place rules that derive from the lessons 

we have learned in the most recent crisis. And as I said, we are 

here not because of concerns over the amount of compensation in 

general, but fundamentally because we think the incentive structure has contributed to excessive risk-taking. 

The gentleman from Alabama is recognized for 5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, I thank you for holding today’s hearing on executive compensation, which is the first of a series on regulatory reform in the future of our financial system. 

There is no question that there have been some questionable decisions made by some of our major corporations regarding executive 

pay. However, I strongly believe that it is neither the Executive 

Branch nor Congress’ role to mandate compensation policies, or the 

role of this Congress or the Executive Branch to determine who sits 

on a corporate board of directors or to interfere with corporate governance in any way. 

What we need instead is a strategy to get us out of what we have 

witnessed in the past 6 months, and that is government command 

and control of businesses. We need to get the government out of 

businesses, and what we need is no further intrusion in what 

should be private economic decisions made by corporations or directors and their shareholders. 

Mr. Chairman, the series of regulatory reform hearings scheduled will, I believe, be among the most important the committee 

will be holding this year, and perhaps the most important hearings 

that we will hold in the 111th Congress. In these hearings, we will 

determine how we rebuild our financial system and whether we lay 

the foundation for economic growth and prosperity or whether we 

repeat the same mistakes that led us to the brink of ruin and those 

we have made since September. 

Later this afternoon, the Republican leadership of the Financial 

Services Committee will unveil a proposal to reform our financial 

regulatory system. The Republican regulatory reform proposal calls 

for a return to market discipline and an end to bailouts, government intrusions into business, and the government picking winners 

and losers. The government plan addresses the major flaws in our 

current system exposed by the financial crisis. 

And I look forward to working with my colleagues on both sides 

of the aisle on this and other proposals for reforming our regulatory system. 

Over the past year, we witnessed unprecedented government 

interventions into the financial system and into corporate governance. Hundreds of billions of dollars have been spent recapitalizing 

individual financial institutions, some of which were probably insolvent and should have gone into bankruptcy proceedings instead 

of being propped up with taxpayer dollars. 

The Federal Reserve’s balance sheet has more than doubled from 

roughly $870 billion before the crisis to over $2 trillion now, according to remarks made by Federal Reserve Chairman Ben Bernanke. 

In the short run, government interventions may have stabilized the 

market, but I fear that these repeated multibillion dollar taxpayer 

bailouts are weakening our financial system and now threaten our 

economic future. 

4 

Combined with the current Administration’s borrow-and-spend 

fiscal policy, many have come to believe, including myself, that the 

vast expansion of the Fed’s balance sheets is in itself becoming a 

systemic risk to our national economy far greater than the failure 

of any private financial institution. It also I think fundamentally 

affects our ability to borrow money and the price at which we borrow that money. 

To restore our economy, we should reject the philosophy that has 

transformed us into a bailout nation. However, there are some who 

want to go further in trying this failed government policy of rescuing too-big-to-fail institutions by crafting a resolution authority 

or systemic risk regulator which would give the government and 

government bureaucrats the power to use taxpayer money to prop 

up certain financial institutions. 

We may think that we own AIG, the government, but in fact, I 

think AIG and these companies end up owning us. 

Mr. Chairman, the appropriate response to this very real problem of handling market failures is, we should resolve insolvent 

nonbank institutions, no matter how large or systemically important, through the bankruptcy system. Bankruptcy is a transparent 

and impartial process with well-settled rules and precedents. It is 

far preferable to a vaguely defined resolution authority that encourages moral hazard and further entrenches megabanks and 

other large institutions as wards of the State. 

In conclusion, it is important for the regulators to monitor the 

interactions of various sections of the financial system and to identify risks that could endanger the stability and soundness of the 

system. But it is unwise for Congress to place the stewardship of 

our economy in the hands of a super regulator thought to possess 

superhero powers to spot bubbles in excessive risk-taking before 

markets crash, given that we have no way of telling whose forecast 

will be right and whose will be wrong. 

In conclusion, I would remind my colleagues of a comment made 

by the Fed Chairman on March 28, 2007: ‘‘At this juncture, the impact on the broader economy and financial markets of the problem 

in subprime markets seems likely to be contained.’’ 

My colleagues know I have the highest respect for Chairman 

Bernanke, but in this case, he obviously could not have been more 

wrong. This committee must have the courage to reject cause for 

a new regulatory regime that depends on the infallibility of the 

government regulators who have so far shown themselves unable 

to anticipate crises, let alone prevent them. We must encourage a 

return to market discipline. 

Thank you. 

The CHAIRMAN. The gentleman used an extra minute and 10 seconds. I would be glad to add that to both sides if that is acceptable. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. So another minute and 10 seconds on that. 

Mr. BACHUS. I appreciate the chairman. 

The CHAIRMAN. The gentleman from Georgia for 2 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

I think this is a very, very timely and important hearing as we 

grapple with the issue of how the compensation structure affects 

systemic risk. 

5 

I think that I can understand pay for performance, but for the 

life of me, I cannot understand pay without performance. I think 

that gets to the heart of the matter here—pay without performance. So much of the compensation structure, I think, is inequitably distributed through salaries and then their bonuses. I think 

it is the bonus structure that we have to look at very carefully. 

Now, we are responding to an issue that we did not create here 

in Washington or in Congress. This issue was created by overexuberant, overeager executives who were compensated for lack of 

performance. 

The bonus structure is set up so that there is a reward system, 

hopefully a reward system for superior performance, but there is 

no downside to that. There is no reaction for failure. 

If we look back at the history of our performance, we will find 

that many of these executives were rewarded for driving companies 

into the ground. As we and as the American people observe this 

and are looking at this, multimillion dollar bonuses on taxpayers’ 

money while the American people are just hanging on by their fingernails in an economy where the salary and wage disparity has 

continued to widen and widen and widen; so if we look at the history and retrace the unraveling of our economy, there is a very significant role that this out-of-control compensation packaging of executives have led to a degree of the cause of the problem. 

And Mr. Chairman, I appreciate this opportunity to explore this 

issue further. 

The CHAIRMAN. The gentleman from Delaware is recognized for 

2 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman. 

I believe we need to be very cautious in the path that we are 

going down. The form of capitalism we have had in this country for 

decades, generations, even centuries at this point, has worked well. 

The States have created our corporate laws. The shareholders elect 

directors, and the directors set pay. 

Obviously, there have been abuses in this area, and I think we 

all agree on that. And I tend to agree that the compensation structure could have some effect on systemic risk. But does that mean 

that the Federal Government should step in with legislation and 

try to correct this? Given that stockholders themselves can be individuals who are not necessarily a person owning 10 shares or 100 

shares but corporations and others who own tens of thousands of 

shares, mutual funds or whatever, who may not have the true interest of the future of the corporation in mind, other than the immediate profit possibilities, and so as a result that potentially can 

be dangerous. 

I think we need to emphasize to stockholders that they have a 

right to change directors. We need to emphasize to our States that 

they need to have good laws with respect to the ability to be able 

to change directors. 

And I think we need to be very careful in Washington. We have 

gone through a bailout situation. I don’t think anybody looks at 

Washington and thinks, gee, these people really know how to run 

things, either at the Executive Branch or at the Legislative Branch. 

And one reason that people are not being penalized because of 

losses is that we have been willing to step forward with bailouts. 

6 

I think we need to be very careful about that. I don’t think the government intervention is an acceptable end as far as this is concerned. 

So I would encourage all of us to listen carefully, because I think 

there are some good points to be made, to think deeply about what 

we are doing and make sure that we do not upset something which 

has the history of working pretty well in this country. Maybe we 

can tweak it, but we need to be cautious about how far we go. 

I yield back, Mr. Chairman. 

The CHAIRMAN. Mr. Sherman for 2 minutes. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I agree with the ranking member that if we have a risk regulator, this should not morph into an agency that could put taxpayer 

money at risk or engage in bailouts. It should not be permanent 

TARP. 

As to TARP, it provides for appropriate standards of executive 

compensation. I regret the fact that the Administration seems that 

it will apply this only to those entities that have received three 

scoops of ice cream. I would think that, if you read the law, it 

should apply to any company that receives even one infusion of 

TARP funds. 

The people of this country were outraged at executive compensation. That was not only understandable; it was valuable. And it will 

lead promptly to the return of some $68 billion to the Treasury by 

various banks that they would not have done if it was not for this 

outrage and the governmental reaction to it. 

As to the proposals we are considering today, as to say-on-pay, 

I believe we ought to look at that being binding, not just advisory, 

and we ought to set as many of the standards here in this room 

rather than just transfer authority to the SEC. We are talking 

about shareholder democracy. Democracy starts by legislating by 

the elected representatives of people, not just granting power to an 

unelected board. 

There are those who say that corporate boards will exercise the 

authority, and if they don’t, well, there can be shareholder elections. The process of picking shareholder boards would make Hugo 

Chavez blush. After all, corporate funds can be used in unlimited 

quantities to back one side and to fight the other. 

As to the pernicious incentives, I think we are all against them. 

It will be extremely difficult to design a system where an executive’s compensation reflects whether that executive actually helped 

the company in the long term rather than simply made it look good 

in the short term. This will be easier for those who have companywide decisionmaking since we could give them restricted stock in 

the entire company. But those who led to the success or failure of 

a single unit, it will be far more difficult. 

I yield back. 

The CHAIRMAN. The gentlewoman from Illinois for 2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I am disappointed that some Federal officials are moving in the 

direction of government-determined pay, not just for senior executives of United States companies, but for their secretaries, the analyst, and the janitor. I think that is a slippery slope or worse. 

7 

Don’t get me wrong; financial criminals must be brought to justice, but most importantly, risky behavior in the financial services 

industry must be addressed. And I think we can do that with 

smarter, more effective financial services regulations that rein in 

reckless behavior, risky leveraging and concentrations of capital. 

In addition, our financial services institutions need to retain the 

best and the brightest. We need not induce fear in our future financial service leaders or workers but provide them with improved 

guidelines that foster competition for the benefit of U.S. consumers, 

businesses, investors, and our economy. 

And with that, I yield back. 

The CHAIRMAN. The gentleman from Kansas is recognized for 1 

minute. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

I want to commend you for your leadership on executive pay 

issues and for holding today’s hearing so we can review how compensation affects risk-taking for better or for worse as we consider 

financial regulatory reform. One of the most important lessons I 

think we can learn from the financial meltdown is that excessive 

risk-taking and overleveraged activity with little or no oversight 

will lead to instability. As this committee considers financial reg reform we need to guard against destabilizing activity and identify 

the proper role of risk in a thoughtful way by improving compensation, risk management, and corporate governance practices. 

I look forward to hearing our witnesses’ testimony on these important issues. 

And again, thanks, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling, for 

2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Executive compensation limits to address systemic risk are the 

wrong remedy for what is probably a nonexistent problem. Any 

compensation legislation considered by Congress ought to be driven 

by two key principles: 

Number one, executives of failed companies who come to taxpayers with tin cup in hand must be subject to compensation limits, period; let there be no doubt. 

Number two, except for the first principle, Congress has no business setting artificial and mandatory limits on anyone’s pursuit of 

their American dream. If someone aspires to be the next Bill Gates, 

Oprah Winfrey, Warren Buffett, or Charles Schwab, we should tell 

them, the sky is the limit, go for it, not, we are the U.S. Congress, 

you will not be allowed to go beyond the 10th floor, and, oh, by the 

way, take the stairs. 

Now, I will be the first to admit that many compensation arrangements strike me as risky, illogical, unreasonable, if not downright offensive. But the solution to any concerns regarding executive compensation practices is for, number one, the shareholders to 

vote for a change in management or to take their investment dollars elsewhere; and for Congress to reexamine the Tax Code, which 

probably helps drive a lot of these arrangements in the first place; 

and even more importantly, to quit bailing out companies who fail 

in part due to flawed compensation systems. 

8 

Finally, I hope, I hope that in America the term ‘‘systemic risk’’ 

is not now being used the way the term ‘‘internal securities’’ was 

once used in the farmer Soviet Bloc, a justification for almost any 

and all government intervention. 

For those who truly want to reduce systemic risk, I suggest a 

first look to Fannie Mae and Freddie Mac. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Indiana is recognized for 3 

minutes. 

Mr. CARSON. Thank you, Mr. Chairman, for your tremendous 

leadership on the issue of executive compensation and for holding 

this hearing. 

This issue promises to be one of the most important of the upcoming regulatory reform legislation. Recently, there have been a 

number of interesting characterizations of efforts to reform executive compensation structures on Wall Street. 

In the wake of the worst economic crisis since the Great Depression, many financial industry leaders have insisted that CEO compensation is self-correcting. They urge inaction on reform, insisting 

that shareholder and media scrutiny has already moderated pay for 

leaders of poorly performing companies. They claim, if we enact 

stronger reforms, our financial talent will be driven overseas and 

our economic recovery will be delayed. 

What is missing from that argument is both clarity and reason. 

For the 175 executives whose companies helped fuel the current 

economic crisis that ultimately required hundreds of billions of dollars in taxpayer assistance, I believe a capable compensation overseer should have the discretion to determine whether or not these 

companies’ compensation packages are reasonable. 

In any other industry, when someone takes excessive risks that 

lead to monumental failures, there are repercussions. Wall Street 

seems to expect a separate set of rules. 

For my constituents, this double standard is nothing new. They 

know that, 30 years ago, the CEOs took home 30 to 40 times what 

average workers made, and now that number has exploded to 344 

times an average worker’s pay. They know that while the average 

CEO pay dropped by $1 million last year, many average workers 

were laid off. They know that the average bonus payments to Wall 

Street executives represent more than they hope to earn over a lifetime. And they know that, once again, Main Street is paying for 

the actions of Wall Street. 

My hope is that industry leaders understand that calls for executive pay reform are not a retaliation for our current economic reality but rather an attempt to usher in a new era of real corporate 

responsibility. I hope that executives realize that performance incentives that are tied to the long-term success and soundness of an 

institution are essential if we hope to monitor systemic risk and restore confidence in our markets. 

With that in mind, I look forward to working with the Administration, the chairman, and my colleagues on this committee. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentleman from New Jersey is recognized for 

2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. 

9 

I appreciate the gentleman who just spoke, his comments, and I 

appreciate the witnesses here today and the chairman for holding 

this hearing. 

Today, we are exploring compensation structure and systemic 

risk. But to me, as I look at it, the Federal Government really is 

the one that poses the single biggest systemic risk, and it is really 

not even close. 

Part of the reason the government poses such a large systemic 

risk is because of the often misguided Federal Government policies 

we have seen. Yet government officials with their long-term track 

record of success continue to come forward with proposals that, to 

one degree or another, dictate to private firms just about how they 

should properly compensate executives and measure performance. 

Look, there is certainly room for improvement at particular individual companies in putting together compensation practices. And 

to the extent this discussion today, just like the gentleman from 

the other side just made his comments just now, helps to inform 

boards as they take a closer look at their compensation policies, 

that could all be a positive development. 

But you know, I have a problem. I believe the American people 

are growing weary of recent government overreach into the private 

sector. With the government now owning GM, and with the way 

the rule of law was disregarded in the Chrysler bankruptcy case, 

dangerous actions are taking place which will create uneven playing fields and increasingly inject political decisions with so many 

unintended consequences into our economy. 

So individual boards from companies have a responsibility for establishing compensation packages that not only take into account 

the long-term best interest of the company and its shareholders, 

but also allow them to attract the best available talent. This is a 

fundamental underpinning of our free market economy, and it 

should not be put in the hands of government bureaucrats. 

With that, I yield back. 

The CHAIRMAN. The gentleman from Florida for 2 minutes, Mr. 

Klein. Is he here? 

We will hold off then. And let me go to the gentleman from 

Texas, Mr. Neugebauer, for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

One of the things that has happened over the last few months 

is we have formed new entities called TSEs, that is taxpayer-supported entities. And that is where the American people were impressed to be shareholders in companies that, in many cases, they 

wouldn’t have invested on their own. But, unfortunately, that marriage was made. 

And I would guarantee that if you think the marriage isn’t working very well, wait until you see the divorce as we try to unravel 

these. But yet this looks like we are moving in the direction of increasing the consequences of this marriage. 

One of the things that I think is ironic is we are focusing on compensation rather than performance. And one of the things that is 

most embarrassing, I think, about all of this is that we have people 

who have never run anything trying to tell companies how to run 

their own business. We have people that the only risk they may 

10 

have ever taken is to buy a lottery ticket trying to tell companies 

how they should move forward with their business plans. 

I think it is a poor direction for us to move. If we really want 

to help the shareholders and help the American people, first, we 

need to get them out of these businesses. Second, we need a regulatory structure that ends these bailouts; ends the government 

picking winners and losers; and more importantly begins to put a 

market discipline into these companies. Letting them fail, knowing 

that there are consequences. 

If you think shareholders will have an uprising, wait until they 

think that they are about to lose their investment. Today, we send 

a signal, hey, you may not lose your investment, or more importantly and more sadly is, we say to the American people, guess 

what, you didn’t buy shares in that company; well, we are going 

to buy them for you because we are the government, and we think 

we know what is the best investment of the American taxpayers’ 

money. 

And by the way, we don’t have any of this money. This is all 

money that we are borrowing. We are borrowing from China and 

Japan and from people that we are selling—we are having to buy 

energy from on a daily basis. 

The American taxpayers are sick and tired of being shareholders. 

Let’s get them out of that. Let’s get an exit strategy. And more importantly, let’s don’t let the Federal Government encroach in the 

business any more than it already has. 

The CHAIRMAN. The gentleman from California for 2 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

I would like to begin by thanking you for facilitating this hearing 

this morning. 

Executive compensation has been a complicated and reoccurring 

issue in our discussions on financial reform. As you yourself have 

mentioned, compensation that promotes excessive risk is a systemic 

concern. To that end, what occurs in financial centers, such as 

Manhattan and Charlotte, affects everyone across the country, including residents from my district in California. 

Some of the compensation packages that were lavished on top executives are mind-boggling. Former executives, such as Merrill 

Lynch’s John Thain or Countrywide’s Angelo Mozilo, were collecting salaries and bonuses into the multimillions while running 

their companies into the ground. 

To the extent these CEOs and others were incentivized to 

produce short-term profits, they were equally as incentivized to 

flood the market with predatory loan products, such as subprime 

mortgages; weaken their shareholders long-term prospects for financial gain; and increase systemic risk. As a result of this increased systemic risk, the American taxpayer has been asked to 

bail out financial institutions through liquidity tools, such as the 

Capital Purchase Program and the Term Asset-Backed Securities 

Loan Facility, or TALF. That gift is not a gift but rather a loan 

from the public and, as such, requires certain protections. One of 

these protections is a special master or pay czar who will place 

transparency into the system so the public and shareholders are 

properly informed. 

11 

To the extent bonus compensation poses a systemic risk, it, too, 

merits some limits. 

I thank our witnesses today for helping us to frame a discussion 

on which bonus compensation limits may be appropriate to rein in 

systemic risk. That said, I do not believe non-TARP recipients 

should have their salaries capped by the President or the Congress. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

The CHAIRMAN. We will do 1 minute now for Mr. Moore, then Mr. 

Campbell, then Mr. Peters, and we will be finished. 

Mr. Moore for 1 minute. I apologize. All right. Then we will go 

to Mr. Campbell for 1 minute. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

You know, there is no argument that there have been instances, 

a number of them, in which people in companies have been paid 

a great deal for not very much performance. The question is, what 

do we do about it? 

As someone who has designed incentive compensation plans for 

hundreds of employees in my own business over a 25-year career, 

I will tell you that it is not easy; that sometimes you pay people 

too much for too little performance and sometimes you pay people 

too little for too much performance, for a lot of performance. And 

the idea that somehow that some Washington bureaucracy, distant 

Washington bureaucrat, can do this better than people in a business and in the company is simply ludicrous. 

Also I believe the idea of having a direct shareholder vote opens 

up the idea of direct democracy within corporations which leads to 

the question of, well, should we also have them approve union contracts, approve major expenditures, etc., all of which arguably have 

done more to bring companies down over the years than excessive 

compensation. 

Instead, in my view, the SEC is moving in the right direction by 

giving shareholders greater rights to make nominations for and 

changes in the board of directors when they get too cozy with management. I yield back. 

The CHAIRMAN. Finally, the gentleman from Michigan, Mr. 

Peters, for 1 minute. 

Mr. PETERS. Thank you, Chairman Frank, for holding this hearing and for your leadership on this issue. 

It is estimated that as many as 100 million Americans own stock 

either in individual accounts or through a mutual fund, and those 

investors have lost trillions in the current stock market decline. 

There is no doubt that one of the causes of the current financial 

crisis was executive compensation schemes in place in many of the 

largest financial institutions, from the top executives to the traders 

on the floor, people who are receiving a compensation package that 

emphasized short-term gains rather than rewarding long-term 

growth and shareholder wealth. 

I am happy that the Obama Administration has announced that 

they are taking steps to address this issue by calling on Congress 

to pass legislation that requires companies to hold an advisory 

shareholder vote on compensation and mandating their corporate 

boards use independent compensation advisors. 

Tomorrow, I will be introducing legislation that will do that and 

more. It will also include a number of other provisions that I beVerDate Nov 24 2008 16:38 Nov 05, 2009 Jkt 052398 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\52398.TXT TERRIE
12 

lieve will reform corporate governance practices by empowering 

shareholders to have a greater oversight over the management of 

the companies that they own. 

I look forward to hearing the testimony today. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the members. 

And we will begin with the witnesses. 

Let me say we have an important subject. We have, as always, 

too many members on this committee, and I am going to hold everybody strictly to the 5-minute rule. No one will be recognized as 

a member after the 5 minutes. We will allow witnesses to give a 

short answer to finish up. And if you ask a complicated question 

with 30 seconds left, it will be your fault if you don’t get a serious 

answer. 

We will begin with Mr. Sperling. 

STATEMENT OF GENE SPERLING, COUNSELOR TO THE SECRETARY OF THE TREASURY, U.S. DEPARTMENT OF THE 

TREASURY 

Mr. SPERLING. Thank you, Chairman Frank, and Ranking Member Bachus. It is very good to be here. I appreciate that you are 

holding this hearing. I think there is little question that one contributing factor to the excessive risk that was central to the crisis 

was the prevalence of compensation practices at financial institutions that encourage short-term gains to be realized with little regard to the potential economic damage such behavior could cause, 

not only to those firms but to the financial system and the economy 

as a whole down the road. 

Compensation structures that permitted key executives in other 

financial institutions to avoid the potential long-term downsides of 

their actions discouraged a focus on determining long-term risk and 

underlying economic value while reducing the number of financial 

market participants who have an incentive to be the important canary in the coal mine. 

I want to make clear, as Secretary Geithner said yesterday, our 

goal is to help ensure there is a much closer alignment between 

compensation, sound risk management, and long-term value creation for firms and the economy as a whole. Our goal is not to have 

the government micromanage private-sector compensation. 

As Secretary Geithner said yesterday, we are not capping pay. 

We are not setting forth precise prescriptions for how companies 

should set compensation, which can be counterproductive. And we 

come to this with a clear-eyed sense of both the seriousness and 

the humility one must bring, both the importance of the issue but 

also the care and rigor one must take to ensure that well-intentioned actions do not lead to unintended consequences. 

I will mention just a few of the principles that Secretary 

Geithner laid out yesterday, a couple of examples, and then I look 

forward to the discussion. 

One, compensation should accurately measure and reward performance. And I think this is an important issue. It is a lot easier 

to get everybody to agree that performance—pay should be performance-related. But it is a lot more complex to find out what is 

that right mix of metrics that ensures that it is true performance. 

13 

Simply using stocks, as they say, can confuse brains for a bull 

market and, on the other hand, not properly rewarding an executive who may be doing enormously well in a difficult economic time. 

I think one of the things we should study carefully is what is the 

careful mix of metrics that truly rewards performance in fact and 

not just in name. 

Secondly, compensation should be structured in line with time 

horizons, the right time horizons. A friend of mine said to me recently, it is like there is an entire industry which is—you know entire sets of financial actors which are able to realize private gains 

in a single year for risks they are creating over a 30-year period, 

which could be externalized to either their firm or, as we have 

seen, the economy as a whole. We need to have structures that 

help internalize those risks to make sure that we are having—that 

those—that it is not easy for financial actors to simply put off the 

potential harm they could be leaving to their firm, their shareholders, and the economy as a whole. 

Third, compensation practices should be aligned with sound risk 

management. Now, this authority and dependence of risk managers 

within firms, ensuring they are independent, compensated well, is 

most important when you are going through a period of excessive 

optimism, where asset depreciation can temporarily make the reckless look wise and the prudent look overly risk adverse. 

Former Federal Reserve Chairman William McChesney Martin 

once said, the job of the Federal Reserve is to take away the punch 

bowl just when the party starts getting interesting. Likewise, risk 

managers must have the independent stature and pay to take the 

car keys away when they believe a temporary good time may be 

creating even a small risk of a major financial accident down the 

road. 

Fourth, we should examine whether the prevalence of golden 

parachutes and supplemental retirement packages truly align the 

interest of executives with shareholders. Lucien Bebchuk, who will 

be speaking to you, has written that firms use retirement benefits 

to provide executives with substantial amounts of stealth compensation, compensation not transparent to shareholders that is 

largely decoupled from performance. 

And concerning golden parachutes, there is more evidence that 

they are prevalent, not tied to performance or even mergers and acquisitions. And I fear that they leave the understandable impression that there is a double standard in our economy when top executives are rewarded for failure at the same time working families 

are forced to sacrifice. 

Finally, we believe that it is very important to have greater 

transparency and independence. The say-on-pay legislation that 

Chairman Frank has long sponsored, and of which President 

Obama as Senator Obama was a co-sponsor in the Senate, would 

be a very significant move forward in terms of transparency and 

accountability. The evidence in the UK shows that it has had a 

positive impact. 

And in terms of the independence of compensation committees, 

I will just say briefly, we start with the same premise as Chairman 

Frank that independence in name does not mean independence in 

fact. But we do believe that if you gave the comp committee the 

14 

funding and authority to be the sole hires of the compensation consultants and the counsel and that you had the SEC go forward to 

ensure a reduction or elimination of conflicts of interest for compensation consultants, it is our hope that we would at least make 

progress and move the ball forward. Thank you very much. 

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

183 of the appendix.] 

The CHAIRMAN. Thank you. 

Mr. Alvarez. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Thank you, Chairman Frank, Ranking Member 

Bachus, and other members of the committee for the opportunity 

to offer the Federal Reserve’s perspective on compensation in the 

financial services industry. Compensation practices at financial 

firms and other business organizations can have a significant effect 

on the safety and soundness of banking organizations and on financial stability. 

Compensation arrangements, which include salary, bonuses, retention payments and other forms of compensation, at any type of 

organization serve several important and worthy objectives. For example, they are important for attracting skilled staff, promoting 

better firm and employee performance, promoting employee retention, providing retirement security to employees, and allowing the 

firm’s cost base to move along with its revenues. 

It is clear, however, that compensation arrangements can also 

provide executives and employees with incentives to take excessive 

risks that are not consistent with the long-term health of the organization. This misalignment of incentives can occur at all levels of 

a firm and is not limited to senior executives. 

In addition, incentives built on producing sizable amounts of 

short-term revenue or profit can encourage employees to take substantial short or long-term risks beyond the ability of the firm to 

manage just so the employees can increase their own compensation. 

Risk management controls and frameworks have proved incapable alone of acting as a break on excessive risk-taking where compensation programs have created overly strong incentives to take 

risk. 

These and other weaknesses in the ways that firms have thought 

about and implemented compensation programs have become apparent during this period of economic stress. As a result, many financial firms are now reexamining their compensation structures 

to better align the interests of managers and other employees with 

the long-term health of the firm. The Federal Reserve is also actively working to incorporate the lessons learned from recent experience into our supervisory activities. 

The Federal Reserve played a key role in the development of the 

principles for sound compensation practices issued by the multinational Financial Stability Board in April 2009. In addition, we 

are in the process of developing our own enhanced guidance on 

compensation practices at U.S. banking organizations. The broad 

goal is to make incentives provided by compensation systems at 

15 

these institutions that we supervise consistent with prudent risktaking and safety and soundness. 

In developing this guidance, we are drawing on expertise within 

the Federal Reserve, as well as on research from the broader academic community and other compensation and industry experts. 

Our investigations suggest that there are certain key principles 

that should guide efforts to better align compensation practices 

with the safety and soundness of financial institutions. 

First, to be effective, compensation practices must be properly 

aligned throughout a financial firm. This includes careful review 

and construction of compensation programs at the level of middle 

management, traders and other individuals who can alter the risk 

profile of the firm. Firms’ boards of directors and supervisors must 

broaden the scope of their review of compensation practices beyond 

the traditional focus on senior executives. 

Second, compensation practices must take into account the risks 

of the activities and transactions conducted by the firm and not 

simply be based on targets for short-term profits, revenues or volume. Substantial financial awards for meeting or exceeding volume 

revenue or other performance targets without due regard to the 

risk of the activities can create incentives to take unsound risk. 

Moreover, incentives that reward good performance but that do not 

adjust compensation downwards when risks are increased or performance targets are missed are not effective in limiting risk. 

Third, more can and should be done to improve risk management 

and corporate governance as it relates to compensation practices. 

This will involve more active engagement by boards of directors 

and risk management functions in the design and implementation 

of compensation arrangements firm-wide. Improvements in compensation practices are likely to be harder to make and take longer 

than anyone would like. One size will not fit all firms. 

However, well-crafted supervisory principles can play an important role in moving practices in the right direction. I appreciate the 

committee’s interest in this important topic, and I am happy to answer any questions you may have. 

[The prepared statement of Mr. Alvarez can be found on page 78 

of the appendix.] 

The CHAIRMAN. And finally, on behalf of the SEC, Mr. Breheny. 

STATEMENT OF BRIAN V. BREHENY, DEPUTY DIRECTOR, DIVISION OF CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. BREHENY. Good morning, Chairman Frank, Ranking Member 

Bachus, and members of the committee. I am pleased to be with 

you here today to testify on behalf of the Securities and Exchange 

Commission so that I may share with you our thoughts on the topic 

of executive compensation. 

As an initial matter, I think it is important to note that as the 

landscape of compensation practices continues to change, the Commission is committed to keeping the disclosure rules we administer 

up-to-date so that investors have the information they need to 

make informed investment and voting decisions. 

As we all know, in recent years, the issue of executive compensation has garnered significant public attention. As revelations about 

16 

executive compensation come to light, claims have been made that 

bonuses and severance packages at some companies have been exorbitant. Indeed, executive compensation has been a lightning rod 

amplified by the recent financial crisis for concerns about the accountability and responsiveness of some boards of directors to the 

interest of their shareholders. 

We believe that, in order for public markets to function properly, 

it is crucial that shareholders, the owners of the company, be able 

to make informed decisions about their investments and that 

shareholders can hold the members of the board of directors accountable for their decisions. Notwithstanding the Commission’s 

current rules, we recognize that there is an ongoing vigorous debate between those who believe that there should be more substantive constraints on pay and those who believe the Federal Government should never or rarely set pay parameters. It is important 

to note, however, that this debate is significantly more meaningful 

as a result of our disclosure rules. 

However, the challenge the Commission has always faced in promulgating and administering its executive compensation disclosure 

rules is that compensation practices are not static. As a consequence, the Commission has revised its disclosure rules as necessary to keep pace with new developments in compensation practices. Most recently, in 2006, the Commission adopted a comprehensive package of amendments to its rules that was intended 

to significantly improve the existing regime of executive and director compensation disclosure. 

While the adoption of the 2006 rule revision significantly expanded the extent and strengthened the caliber of compensation 

disclosure, the Commission is once again considering further possible enhancements. It has been suggested that some companies’ 

executive compensation has become disconnected from long-term 

company performance because of the interests of management, in 

the form of incentive compensation arrangements, and the interests of shareholders are not sufficiently aligned. 

Critics have complained that, in some cases, the incentive structure created by executive compensation may have driven management to make decisions that significantly and inappropriately increase company risk without commensurate risk to management’s 

compensation should the decision prove costly to the company. Indeed, one of the many contributing factors cited as a basis for the 

current market turmoil is the misalignment at a number of large 

financial institutions of management’s financial interests with 

those of shareholders. 

Compensation policies and incentive arrangements represent just 

one of the issues that the Commission plans to take up next month 

when it considers a broad package of proxy disclosure enhancements. Many of these enhancements are designed to provide shareholders with additional information about their company’s key policies, procedures, and practices. For example, the Commission plans 

to consider whether greater disclosure is needed about how a company and the company’s board in particular manages risk, including within the context of existing compensation plans and setting 

compensation levels. 

17 

The Commission also plans to consider whether greater disclosure is needed about a company’s overall compensation approach, 

in particular as it relates to the company’s risk management and 

risk-taking beyond decisions with respect only to the highest-paid 

executive officers. 

The Commission further plans to consider proposing new disclosure requirements regarding compensation consultant conflicts of 

interest. 

In addition to these executive compensation disclosure enhancements, the Commission plans to consider proposals related to the 

directors themselves. For example, it plans to consider whether to 

enhance disclosure of director-nominee experience, qualifications, 

and skills so that shareholders can make more informed voting decisions. 

The Commission further plans to consider proposed disclosures to 

shareholders about why a board has chosen its particular leadership structure, such as whether that structure includes an independent Chair or perhaps combines both the CEO and the Chair 

in one position, again so that shareholders can better evaluate the 

board when making a voting decision. 

Notwithstanding the Commission’s executive compensation disclosure requirements, however, it has been argued that, absent a 

more effective way for shareholders to exercise their fundamental 

right to nominate and elect directors to the company’s boards of directors, board accountability to shareholders cannot be maximized. 

Accordingly, on May 20th, the Commission voted to approve for notice and comment proposals that would give shareholders a more 

effective way to exercise their State law rights to nominate directors. 

Under the proposal, shareholders who otherwise have the right 

to nominate directors at a shareholder meeting would, subject to 

certain conditions, be able to have a limited number of nominees 

included in the company proxy materials that are sent to all voters. 

To further facilitate shareholder involvement in the direct nomination process, the Commission also proposed amending its shareholder proposal rule to require companies to include proposals related to the nomination process in their proxy materials, provided 

that certain other requirements of the rule are met. 

If adopted, we believe these new rules would afford shareholders 

a stronger voice in determining who oversees management in the 

companies that they own. 

Thank you again for inviting me to appear before you today. On 

behalf of the Agency, we look forward to working with Congress 

and with this committee going forward on these issues. I would be 

happy to answer any questions you may have. 

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

148 of the appendix.] 

The CHAIRMAN. Thank you. 

Before I get to questions, I do want to comment on some of what 

we have heard earlier from my member colleagues. I think what 

we have heard today is the final repudiation of the Bush Administration by many of my Republican colleagues, because we have 

heard a fairly vigorous and thorough denunciation of the various 

18 

actions of that Administration; no more bailouts, no more taking 

over companies. 

Well, AIG, I remember, in September of 2008, being told by Secretary Paulson and Chairman Bernanke, two Bush appointees, that 

they had decided with no congressional input or even advice to advance $82 billion to AIG. 

Two days later, we were asked by the same two Bush appointees 

to initiate the TARP program of $700 billion. 

Subsequently, we worked with the Bush Administration, and 

after we were unable to pass a bill because the House passed it and 

the Senate didn’t, involving the auto companies, the Bush Administration initiated it. 

So we are talking now about a Bush Administration initiation of 

funding for AIG, a Bush Administration request to Congress to create the TARP, and the Bush Administration intervention without 

congressional final action in the auto companies. 

How that became a Democratic agenda puzzles me. Perhaps I 

will be enlightened later on. 

I do know that I have colleagues who believe that the world was 

created only 4,000 years ago. I had not previously known there 

were some who thought it was created on January 20, 2009. 

So I do want to say, we are engaged in this, and we are engaged 

and have been engaged for months in dealing with the consequences of decisions made by the Bush Administration, some of 

which I agreed with, although I thought they weren’t carried out 

well. 

I would note on the TARP money that, thanks in part to an increase in the conditions that have been imposed on TARP recipients both by the Congress and the Obama Administration, more 

than one-third of the money advanced to banks has already been 

repaid to the Treasury. Now, we have to decide what we do with 

that. 

But those who consider the whole $700 billion gone have to cope 

with the fact that of approximately $200 billion advanced in less 

than a year, more than $70 billion has come back, some of which 

exceeded the loans because there was some interest. 

Now, these are complicated questions to be worked out. And I 

would not ordinarily have brought this up, but listening to what I 

heard before, it did seem to me the history was relevant. Yes, we 

have had a problem with bailouts. 

The second point I would make is that a say-on-pay comes from 

England. It is not some intervention. It is not a bailout. The compensation matters we talk about, and I try to be very clear, it is 

one thing to have fairly intrusive compensation restrictions when 

people are getting money directly; it is another when we are talking about risk assessment. 

And so I will now ask my question of these three gentlemen. One 

of the arguments we have heard is that if we restrict compensation, 

it will contribute to capital fight, that people will flee America. It 

has been my experience that, in the first place, American corporate 

executives were rewarded far better in dollar terms and other ways 

than others. Sometimes I think the Japanese executives and American executives are paid the same amounts, except in our case it 

19 

is dollars, and in their case it is yen, and so the yen-dollar difference means that ours are getting a lot more. 

But I would ask all three of you, is there a danger if we were 

to adopt say-on-pay or some of the other rules that you are proposing, that we would have the capital flight that some of the best 

and brightest who have run the financial system with such elan 

would now decide that they were not sufficiently appreciated and 

would move to other countries? 

Let me begin with Mr. Sperling. 

Mr. SPERLING. Chairman Frank, I suppose if one were to put a 

hard and arbitrary cap on the top talent at a firm, that could lead 

to flight and the kind of deterioration that you mentioned. 

But as far as I know, I can say with certainty that there is nobody in the Obama Administration who is proposing such things. 

What we are proposing in the legislation we did put forward yesterday is greater transparency and accountability to the owners of 

the company. We find, and I think practice has shown, that sunshine and transparency does have a powerful deterrent effect on 

improper or ill-advised behavior. And I think, even more important, 

it starts an important dialogue. 

The CHAIRMAN. I want to talk strictly about the competitive 

piece. 

Mr. SPERLING. I do not believe that anything we are proposing 

today or that you have proposed would have a deterrent impact. 

The CHAIRMAN. Let me ask Mr. Alvarez. 

Mr. ALVAREZ. Mr. Chairman, I think one good piece of information here is that the world is looking at this problem as well. So 

the British have already begun to consider it. The Swiss have proposed some principle similar to what we have discussed today. 

As I mentioned, the board has worked on an international panel 

with a financial stability board. So this is a global issue with a 

global set of solutions that the globe is coming to consensus on. 

The CHAIRMAN. Thank you. 

Mr. Bachus? 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, your earlier remarks, I will just say that whether 

we tag this on Bush, sort of pin the tail on the donkey, or whether 

we pin it on the elephant, it is now all of our problems. And it is 

now; it is not then. And I just ask that we all work together to get 

us out of this, these bailouts and these government-funded programs, and that we extricate ourselves from that and the deficit 

spending that we have witnessed. 

So we will work together on that I hope. 

Let me say this. Gene, you and I have worked on several things. 

I have a deep respect for you. I very much agree with you that one 

of the contributing factors to the excess risk-taking that was central to the crisis was compensation that was linked to short-term 

gains without any consideration of the long-term risk. As you say, 

across the subprime mortgage business, brokers were compensated 

in ways that placed a high premium on volume without regard to 

whether the borrowers had the ability to make those payments. 

That is pretty clear. I associate myself with all of those remarks. 

I also associate myself with the remarks you have made that top 

executives offered those golden parachutes weren’t aligned with 

20 

shareholder interest. You said it creates the impression, and a lot 

of my constituents have this impression, that there is a double 

standard in which top executives are rewarded for failure at the 

same time that working families are forced to sacrifice. We have 

seen instances and a lot of cases where executives received these 

tremendous salaries as they went out the door on failing corporations, and at the same time, most of the workers were being given 

pink slips or their retirement benefits or health care was being cut 

back. 

Having said that, I take those as givens. You say that the goal 

of the Administration now is to move compensation committees 

from being independent in name to being independent, in fact, and 

not only would committee members be truly independent, but they 

would be given authority to appoint and retain compensation consultants and legal counsel, along with the funding necessary to do 

so. This legislation would instruct the SEC, and I think we have 

had testimony from the SEC, to create standards for ensuring the 

independence of compensation consultants, providing shareholders 

with the confidence that the compensation committee is receiving 

objective, expert advice. 

Would all of you gentlemen admit that is a major mandate by 

the government in the corporate governance? 

Mr. SPERLING. Thank you, Congressman. I feel that this is just 

simply trying to ensure that the independence of comp committees 

is as it is advertised, which is independent. The reality is, and I 

say this as a person who has participated in a board of directors, 

if the CEO controls the compensation consultant, you can have an 

independent compensation committee, but the power and the information that is being gathered is being gathered by somebody who 

almost inherently has a conflict of interest in this situation. 

I think one of the things that you try to do is not to intervene 

or micromanage, but I think when you can have transparency and 

reduce conflicts of interest, then you are laying foundations for capital markets to work more efficiently. 

Mr. BACHUS. But you are putting independent people within the 

corporate governance and you are mandating that they be independent and be compensated. That is a type of corporate governance. I guess what I am saying is that 95 percent of the corporations never made a mistake or never performed in a risky manner, 

so you are basically taking and you are saying to all of those corporations we are going to change the rules. 

Mr. SPERLING. Well, as we have seen, it doesn’t take that many 

types of excessive risk-taking to do a lot of damage that goes not 

only to the shareholders but to the economy as a whole. 

We believe if we advertise to shareholders and the public that 

compensation committees are independent, and yet we know that 

if the company itself hires the compensation consultant, if that 

compensation consultant can also be taking other fees and being 

paid by the company, then you have a bit of false advertising. I 

think what we are doing here, far from being intrusive, is simply 

ensuring that the independence of compensation committees, as advertised, is independent, in fact. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlewoman from California. 

21 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to thank our panel for being here today to help us wrestle with one 

of the most serious problems in the financial services community 

dealing with compensation and bonuses, etc. 

There are some things that we have learned about actions that 

were taken that are very disturbing. I don’t know that we have gotten any information to help us understand what went on in some 

of these actions. For example, I want to know what you have discovered, starting with Mr. Sperling, about the authorization for $5 

billion for bonuses to be given to Merrill Lynch employees at the 

time the merger took place between Bank of America and Merrill 

Lynch. I have read accounts in the paper and heard information 

that Bank of America knew and signed this agreement that these 

bonuses could take place. 

Later I am told that the CEO said that he was made to sign an 

agreement understanding that these bonuses were going to be 

given. Normally these bonuses were given at the beginning of the 

year. They rushed them so that they would be given toward the 

end of the year and prior to the signing of the agreement. What 

do you know about this? 

Mr. SPERLING. Congresswoman, there obviously has been very 

contentious discussion which has gone out to the public between 

former Secretary Paulson and the chairman of Bank of America 

over what transpired during that transaction which as you know 

was months before I entered the Obama Administration. 

Ms. WATERS. Yes. 

Mr. SPERLING. I would have to go back, and would be happy to 

do so, and get what our Administration’s best understanding is of 

that dispute. But it is an ongoing dispute with I believe our own 

Justice Department engaged in it, so I don’t have intimate knowledge of where that is right now. But I would be happy to get back 

to you. 

Ms. WATERS. Well, as we try and create public policy around 

some of these issues, what would any of you suggest that we should 

include in legislation that would prevent this kind of action? 

Mr. SPERLING. Well, one thing I would mention is, with the legislation that you all have already passed, let’s remember that in the 

situation of TARP, which I know we are going well beyond, but obviously the legislation you have passed would have limited those 

types of bonuses to one-third of overall salary. So in the case of 

someone receiving TARP, a recipient, had Merrill been a TARP recipient at that point, it would not have been permitted under the 

law. 

But more generally, again, our view is very much to try to have 

greater transparency on the practices, greater independence; and 

we feel very much that these type of practices, when brought to 

light, that the transparency is often decisive. And so when people 

say, for example, say-on-pay is nonbinding, I don’t think that is the 

way it works, in fact. I think it is very, very troubling for a company to face a negative vote in those areas, and few want to take 

that type of public risk. 

Ms. WATERS. Any other comments on this issue? 

Mr. ALVAREZ. Madam Congresswoman, one issue I would add to 

what Gene has said, it is important when an organization has not 

22 

performed well that bonuses be adjusted for that. One of the principles that we think is very important and that the Federal Reserve will incorporate in its guidance going forward is that the 

compensation should be risk sensitive. It should reward good performance. But when performance doesn’t meet goals or when there 

are losses, then the compensation has to be adjusted in the other 

direction. 

Ms. WATERS. That is the Barney Frank law. He is the first one 

who emerged with the risk assessment relative to the management 

of risk basically. He maintained from the beginning that those persons responsible for creating the risk would have to accept the responsibility for the failures. And so I think we are on that path for 

sure. But I just want to make sure that I understand when mergers are occurring, buy-outs are taking place, what the purchasers 

are being forced to do by anybody. I want to understand that better, and I will continue to pursue that. 

Mr. SPERLING. I think, as the chairman would say, in the sayon-pay legislation proposal, there is often a separate vote on the 

golden parachutes in exactly that merger transaction. 

The CHAIRMAN. The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Sperling, in your testimony, you said that you all were going 

to be asking the President’s Working Group to provide an annual 

review of compensation practices so the government can monitor 

whether they are creating excess risk. How will that work? How 

will you determine whether compensation is actually creating excess risks? 

Mr. SPERLING. I think the reason Secretary Geithner felt it was 

good to put this on the agenda, and it is the same reason that you 

hear Mr. Alvarez talking about it from the Federal Reserve’s perspective, we have all learned painfully that compensation is closely 

related to the safety and soundness obligation, not only the Federal 

Reserve, but all of us have. 

I think we also are aware that one always has to be worried 

about fighting yesterday’s war. New practices, new trends can 

emerge, and I think to ask the major supervisors in the U.S. Government to take a yearly look or annual review of what those 

trends are could be again one more check against the type of excessive risk-taking that we have seen, which too often can get a pass 

in exactly a bubble atmosphere where again everybody looks smart 

because assets are all going up year after year. These are exactly 

the times when you need to have more risk management in place 

at companies, and perhaps at the Federal level as well. 

One of the things that Secretary Geithner did was to invite many 

of the major organizations, nonprofits and business groups, to be 

part of that process so we are reviewing not just what may be 

going wrong but also best practices. I think one of the positive 

things that are coming out of the discussion, and we heard in the 

expert meeting that we did, which was a very wide group that went 

from Nell Minow, who you have speaking today, to the Business 

Roundtable, was that there was enormous optimism that there 

could be an emerging sense of best practice if this discussion is rigorous enough and if there is enough of a spotlight shined on it. 

23 

Mr. NEUGEBAUER. One of the things you said in your testimony, 

you said you think one of the major causes of the financial crisis 

we are in today was based on compensation. The problem I have 

with going down this compensation road is where in the chain was 

the compensation inappropriate for the risk being taken? Was it 

the young originator of the loan, or was it at the person at the financial institution that was packaging the loan? Or was it the securities company that was securitizing it? Or was it the investment 

company that was buying those loans? Where in the process was 

the person being overcompensated and the risk and compensation 

out of proportion? 

Mr. SPERLING. I think it is less how much, but it is more—what 

you don’t want, whether it is the person originating the subprime 

mortgage or the executive, is you don’t want to encourage compensation practices where one gets to internalize the gains short 

term and externalize to others the potential risk and harm down 

the road. So, for example, if a subprime mortgage originator, if part 

of their compensation might be based on how the mortgages were 

being paid, that would be a way that you would ask that person 

to think not just about how much volume that I can push this year, 

but whether or not you give have them an incentive or their unit 

an incentive to consider how it is going to perform. Some firms are 

now doing bonuses banks. What they are saying basically is that 

if everybody knew their bonus was going to be held for a few years 

before they got all of it, then if people said we are doing some excessively risky things here, there would be a lot greater incentive 

for people to be self-checks in their own businesses because they 

would see their compensation reduced. 

Across the system, too many people could internalize private 

gains by the volume of what they were doing regardless of its quality or the risk it was externalizing to the firm, the shareholders, 

or as we have painfully learned, the economy at large. 

Mr. NEUGEBAUER. I have a quick question for the three panelists: If you gave me $1,000, and in 2 years, I had made that into $1 million, would it be fair for me to get a $10,000 fee for doing that; yes 

or no? 

Mr. SPERLING. It depends. 

Mr. NEUGEBAUER. Mr. Alvarez? 

Mr. ALVAREZ. I couldn’t say. 

Mr. BREHENY. I couldn’t say. 

Mr. NEUGEBAUER. So you all are going to set compensation for 

companies, yet you do not know what adequate compensation for 

return is, and this is the problem. 

The CHAIRMAN. The House is in recess, so we are not going to 

have to disrupt this. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. I thank all of the 

panelists. I would like to note for my colleagues that I have worked 

closely with Kenneth Feinberg during the 9/11 recovery for New 

York City. He took on an incredibly difficult task determining what 

the compensation would be for families who had lost their loved 

ones. It was a very difficult task, and he won applause from everyone. He did a magnificent job with a murky and confusing problem. 

So I compliment the Treasury Department on your selection, and 

24 

I wish him great success and that he will be as successful as he 

was with the 9/11 Compensation Fund. 

My question to Treasury is, how did you determine the seven 

companies that are going to have their compensation determined or 

guidelined by Mr. Feinberg? Some people have said if there was 40 

percent ownership by the taxpayer, was that the standard? What 

was the standard that determined who the seven companies were? 

Mr. SPERLING. In the regulation itself, it actually mentions the 

specific names of the programs that they are under. But I think 

your question actually goes more towards what is the logic and rationale. 

I think that our feeling is that some of the things we have done, 

some of the facilities that were set up are set up to be generally 

accessible to companies, financial institutions at large. And they 

are often set up because we think that there is a positive public 

purpose in them participating. We think if community banks wanted to not have more capital, if they wanted to do less loans, we believe it is in the interest of recovery to have stronger capitalization 

of banks and a stronger lending profile. So those are generally accessible programs. 

Where a company comes to the U.S. Government and U.S. taxpayer and requires exceptional assistance that is not being offered 

to their peers because they face an enormous threat to their fundamental financial stability that we find to have such an impact on 

the economy as whole that we have to intervene, that is an exceptional case and that requires of us at the Treasury Department to 

have a stronger fiduciary duty to the United States taxpayer. And 

so even though the legislation and Congress has spoken, there is 

the law of the land in the Recovery Act; we felt that the law as 

stated does not have a limit on salary. We felt that in the case of 

companies who received such exceptional taxpayer assistance that 

we had to have a stronger fiduciary duty and we spent a lot of time 

trying to think what was the best way to do that. 

In the end, we felt that if we could find somebody of the judgment and stature of Ken Feinberg who could look across these companies and look at a set of principles on risk and performance, but 

also on whether it is going to lead taxpayers to get return on their 

dollar, that extra level of protection for the taxpayer was necessary 

and important there in the way it would not be if simply a community bank in your district chose to participate in the capital purchase program partly because their government thinks it is a good 

thing for them to have stronger capital and be in a stronger position to lend. 

Mrs. MALONEY. Well, I think everyone understands that if you 

take taxpayer money, you are subject to a higher form of oversight 

and accountability. But the question basically that I am hearing 

from my constituents is, what was the standard? It would be helpful if it was more clear. Is it 40, 50, 60, 80 percent of taxpayer dollars? If it is a standard that the public could understand; and connected to that question, what would trigger the eighth company to 

come into the fold? I certainly don’t think it would be totally the 

discretion of one individual. It should be some form of public standard that people can understand and hopefully support. 

25 

So my second question is: What would trigger, say, an eighth 

company to be under the same type of supervision as the seven 

companies named in the legislation? I will go back to the legislation, but I am still a little unclear as to what was the standard and 

I think it would be helpful if the standard was clearer to the public 

and to Members of Congress as to how these particular companies 

were selected. I would think that the easiest form is what is the 

degree of public funding that has gone into them. 

The CHAIRMAN. The gentlewoman’s time has expired. Is there a 

brief answer? 

Mr. SPERLING. The reason that I feel that exceptional assistance 

is the right standard as opposed to ownership: let’s say that we decided that we did not want to lever up GM and put them in the 

situation of having extremely high debt, which was the problem 

they had, so we gave our assistance through equities. But had we 

done so through very exceptional lending on attractive terms, that 

would not have given us a certain ownership perspective, but you 

would have looked and thought they are receiving exceptional taxpayer assistance that their peers are not. By being in that situation, that brings on a higher fiduciary duty. I think that general 

principle is the right principle. 

The CHAIRMAN. I would advise members we have to be conscious 

of the time and questions with no time left are hard to get answered. 

The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. 

I have an abiding concern what the Federal Government is doing 

in this area versus what the States are doing and in general what 

the Federal Government has been doing in terms of bailout situations and whether it is really working or not. 

My first question to you is, have any of you or your different 

agencies studied who the shareholders are? I say that knowing that 

in many corporations, wealthy private individuals, private firms, 

mutual funds and others become the stockholders of record and 

sometimes very often the voting stockholders. I am afraid their interest may be absolutely no different than some of the so-called 

greedy executives who are looking for immediate compensation? In 

other words, they are trying to get in and out in a relatively brief 

period of time. Are we really serving the public by making these 

changes? I realize as you go through each corporation it would be 

different, but is there a general sense who the shareholders are in 

American corporations today that has been well analyzed? 

Mr. SPERLING. I will let my colleague from the SEC answer; but 

I would say that we have to be very careful in a one-size-fits-all 

metric for rewarding behavior. And I think some of the experts you 

are going to hear in the next panel are very persuasive in making 

that case that simply using stock, while often successful, is not 

foolproof. I think it is something that we should all, us included, 

be studying very carefully and listening to the type of people that 

you have coming up on the next panel. 

Mr. BREHENY. I appreciate the question and having an opportunity to answer it. I don’t know that I have a fulsome answer, but 

I will work with you to get that. 

26 

The issue you bring up is one that we absolutely have considered 

in rulemaking matters that I have been involved in, interest of 

shareholders, long term, short term, percentage ownership, small 

companies versus large cap companies, are many of the issues that 

we think about when adopting rules. It is certainly something that 

we seek comment on when we issue rules, and we have been thinking about economic interest and voting interest in going forward. 

I am aware of those issues, and we think about those issues. I 

don’t know that I have a full answer, if I can give a response, can 

I tell you the makeup of the American shareholders, but those particular interests are definitely raised with the Commission, and it 

is something that we think long and hard about before we adopt 

rules. 

Mr. CASTLE. I think it is important and we need to keep an eye 

on it. My next question is sort of general and it goes back to what 

I said at the beginning. 

What should we in the Federal Government be doing versus 

what the States are doing? Most corporations in this country are 

at the State level. States are beginning to make some changes, not 

dissimilar from what you are saying. As I have indicated, I think 

there are some concerns about some of the compensation factors, 

but I am not sure that the Federal Government should be stepping 

in and doing this. My concern is if we do this, are we going to be 

expected to take the next step, whatever it may be, or are we better off discerning exactly what the problem is and then allowing 

the States to make whatever the decisions are that would be corrective in this case versus doing it at the Federal Government 

level? 

Mr. BREHENY. I am not sure that the Commission itself has 

weighed in on that particular issue. But I think if you go back and 

look at the provisions adopted in Sarbanes-Oxley, the provisions, 

the rules that the Commission has adopted, we have gone to great 

lengths to maintain that balance between the interest of the SEC, 

the authority that Congress has given to the SEC to protect investors, versus the very important State law rights that all shareholders have. 

I think you will see that in many of the rulemakings that the 

Commission has gone through, there is a balance. It is a policy 

question you need to answer, which is why you are asking me the 

question. I don’t know that I can tell you. I think it is an important 

balance. I think State-Federal rights are recognized throughout the 

rules that the Commission has and the authority that the Congress 

has given to the Commission. 

Mr. CASTLE. I understand what you are saying, but I think we 

need to be very careful about how encroaching we are being with 

respect to dictating in terms of corporate structures and corporate 

methodologies involving the Federal Government. I think it can be 

putting the foot in the door for what can happen in the future. I 

think we need to be very cautious. 

Mr. Sperling, I was going to ask you about the structures and the 

timelines you talked about at the beginning, but I will submit that 

question in writing because the red light is now on. 

27 

The CHAIRMAN. I thank the gentleman for his sensitivity to the 

time. I now recognize the gentleman from North Carolina for 5 

minutes. 

Mr. WATT. Thank you, Mr. Chairman. I apologize to the witnesses for not being here for their testimony, but I have been reviewing it. 

I want to take the semantic way in which Mr. Sperling addressed 

these issues differently and ask a broader question. 

The first three principles that you outlined in your testimony, 

Mr. Sperling—compensation plans should properly measure and reward performance; compensation should be structured in line with 

the time horizon of risk; and compensation practices should be 

aligned with sound risk management—are all kind of general principles. But then in the fourth and fifth principles, and you may not 

be aware of this, in the fourth and fifth principles, you shifted to 

a different phraseology. You say we should reexamine whether 

golden parachutes and supplemental retirement packages align the 

interests of executives and shareholders. And number five, we 

should promote transparency and accountability in setting compensation. My underlying question is: Who is the ‘‘we,’’ first of all? 

And the extent to which authority already exists, either at the SEC 

or the Fed, to do some of this under existing statutes, or whether 

there are specific things that this committee and Congress must do 

to change the law to address these issues? 

Mr. SPERLING. Thank you. 

Perhaps in the fourth, I did not use our words well, because I 

think they are actually different. 

I think on the issue of golden parachutes and supplemental retirement packages, we were not coming with a particular legislative or even regulatory proposal. We really were in a sense trying 

to shine a spotlight on a practice that we think— 

Mr. WATT. The ‘‘we’’ in that case being the Treasury Department? 

Mr. SPERLING. The Treasury Department. We are trying to suggest that based on our review, this is a practice that, that there 

are practices on the supplemental retirement accounts, excessive 

retirement accounts for executives and golden parachutes, that 

shareholders and management should reexamine. There may be 

times that they are appropriate, but there seems to be increasing 

evidence that they have been more prevalent. 

Mr. WATT. And my second question? 

Mr. SPERLING. I perhaps chose my words poorly if that implied 

that we, the Treasury Department, had a specific proposal. 

On the fifth point, there we were coming to the table with a specific proposal and it was a proposal to essentially give the SEC the 

authority they need to do two things that we, that the Treasury 

Department and the SEC both feel are in the interest of a sounder— 

Mr. WATT. And those two things, quickly, are what? 

Mr. SPERLING. Are the say-on-pay legislation, which again, we 

are giving the SEC authority to do, and giving the SEC clear legal 

authority to strengthen the independence of compensation committees in the way that after Enron Congress gave the SEC the authority to strengthen audit committees. 

28 

Mr. WATT. I thought the SEC already had this authority, Mr. 

Breheny, and maybe it is not just exercising it. Do you need more 

authority or is it just that the SEC that we have had has not exercised the authority that they already had? 

Mr. BREHENY. No, I don’t believe we have the authority to require companies to have a say-on-pay proposal or to strengthen the 

compensation committee consultants. The Chairman of the SEC is 

on board supporting both the say-on-pay legislation— 

Mr. WATT. Well, if the SEC doesn’t have it, do the regulators 

have it? Or are we talking about all public companies that don’t 

have regulators? What about with banks, regulated banks, would 

the regulators already have the authority to say, you have to have 

a more aggressive compensation committee on your board? Would 

they have the authority already to say you have to give your shareholders a right to have say-on-pay? 

Mr. ALVAREZ. No, on say-on-pay. We would not have the authority to require those kinds of disclosures. That is not safety and 

soundness related. 

On strengthening compensation committees, we may be able to 

do some actions there, but I am not sure we would be able to get 

as far as the Treasury Department would like. 

Mr. WATT. Thank you, Mr. Chairman. 

The CHAIRMAN. I think historically, safety and soundness has 

more often been used to invoke nondisclosure than disclosure. 

The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Mr. Sperling, I listened carefully to your testimony, and in listening to it, I must admit I find myself in agreement with most, if not all, of the principles that you lay out. Compensation plans should properly measure and reward performance, 

structured and aligned with time horizons of risk, should be 

aligned with sound risk management, and the rest. 

For most of my life I have signed the back of a paycheck, but 

there was a time I actually signed the front of a paycheck. There 

was a time I served on the compensation committee of a New York 

Stock Exchange company, and not unlike the gentleman from California in his opening statement, I thought I worked very hard to 

try to ensure that these principles were put into place. 

I remember an unhappy CEO when I was part of a comp committee informing him he would not be getting the pay package compensation structure that he had desired. 

I guess my question for you is, since I have found this challenging, and I was in the private sector for 12 years, and I have 

been a Member of Congress for 61⁄2 years, when I came to Congress, I didn’t have any kind of epiphany that now I know what 

the perfect compensation structure is. Going back to what the gentleman from California said, why can you do better? 

Mr. SPERLING. I don’t think there is anything that we are proposing that suggests we could. I think we are perhaps suggesting 

on the compensation committees, when you were in that position, 

if you had the authority to hire your own compensation consultant, 

if there was not an ability for the compensation consultant to have 

a conflict of interest because they were being paid by the CEO and 

some other measure, that would strengthen your hand. 

29 

You seem to have been able to, in your situation, strike that type 

of independence, and I compliment you on that. But I can say that 

many people find on a compensation committee that if the company 

itself is hiring both the counsel and the consultant, it is very difficult. In fact, there is a study that shows that CEO pay does end 

up being higher when you use a compensation consultant that has 

conflicts of interest. 

Mr. HENSARLING. I appreciate your approach in that regard. It 

will be an open question in my mind whether or not there are ways 

to strengthening the hand or the powers commensurate with the 

responsibilities of comp committees of public companies. I have an 

open mind about that. I can tell you from my experience on this 

committee, though, that there have been many witnesses from private enterprise sitting at that table who have received strong suggestions from this committee that this is a way that you might 

want to do something because if you don’t do something, we will 

do it for you. So I am somewhat fearful that once we go down this 

road, we may go way beyond merely strengthening the hand of 

compensation committees. 

Also, Mr. Sperling, on page 4 of your testimony, you state that, 

‘‘when workers who are losing their jobs see the top executives of 

the firms walking away with huge severance packages, it creates 

the understandable impression that there is a double standard.’’ I 

agree with that impression. Let me ask you since the executive 

compensation first has arisen in terms of TARP, I want to ask you 

a TARP-related question. The Administration put forth a reorganization plan for GM. Under that plan, GM bond holders, many of 

whom are middle-income Americans, including blue collar workers 

and tradesmen who invested money in GM bonds for their 401(k)s 

for their retirement, the GM bond holders under the Administration plan get 10 percent of the company for $27 billion in claims, 

warrants for an additional 15 percent, the United Auto Workers 

get 171⁄2 percent of the company for less in claims, $20 billion, and 

$10 billion in cash, $6.5 billion in preferred stock, $2.5 billion IOU, 

and warrants for an additional 21⁄2 percent of the company. Would 

that not create an impression of a double standard? 

Mr. SPERLING. I really don’t believe so. I really believe that the 

bond holders represented themselves very well. I think they were 

better off than had they allowed for a completely uncontrolled 

bankruptcy. And in terms of the VEBA, it is going to require a very 

painful sacrifice from retirees, retirees who did nothing wrong and 

were not part of contributing to this financial crisis. I believe there 

was very careful, shared sacrifice in that arrangement. 

Ms. WATERS. [presiding] Thank you. 

Mr. Sherman? 

Mr. SHERMAN. Thank you, Madam Chairwoman. 

I am not sure that the bond holders were hurt. Rather, a huge 

infusion of taxpayer money helped all the old stakeholders. I think 

we were more generous with the workers than we were with the 

bondholders. But if anybody is not being treated well in this, it is 

the taxpayers. 

I want to recognize Kathleen Connell who is here in the audience, who for 8 years was controller of the State of California. 

30 

I notice that quite a number have railed against government-controlled pay. I should point out that these are companies that have 

taken and are holding our TARP money. 

I want to join the chairman in welcoming Republicans when they 

reject virtually every Bush Administration economic policy of the 

last 7 months of his Administration, but I think it is now time for 

Democrats to reject with the same intensity virtually all of those 

policies. 

We are told that only a few TARP recipients have received extraordinary help, and only those few should face real limits on executive compensation. I would say that TARP is an extraordinary 

departure from free enterprise and only those who got one infusion 

of, say, $25 billion of capital, should be viewed as getting extraordinary help. 

I have one question for the record, because I would like all three 

of you to answer it, and it is way too complicated to do so orally. 

I want you to imagine how we would design an executive compensation system for the derivatives unit of AIG, or some other derivatives unit inside a big company. If you just said, we will give 

them restricted stock and restrict it for a few years, they might 

take extraordinary risk so the unit looked extraordinarily profitable, get an extraordinary amount of AIG restricted stock, they 

would have believed that AIG would have been a solid company no 

matter what their unit did. I don’t think anybody in that unit or 

in this country realized that unit could bring down that enormous 

company. 

Likewise, keep in mind, at least for this example, assume that 

this unit might show profits for accounting purposes for 5 or 10 

years in a row before it imploded, and now try to figure out what 

kind of executive compensation system would reward the people in 

that unit for taking the right kinds of risks but would actually penalize them for taking the wrong kinds of risk. 

Now for a question for our representatives from the SEC. There 

were elections in Venezuela to control the government of Venezuela. Our State Department criticized Hugo Chavez for using the 

resources of the government to affect the outcome of the elections 

for representatives to control the government. So what can you do 

to propose to Congress or to your own board for regulatory changes, 

rules that would prevent corporate management from using the resources of the company to unduly influence the outcome of the election without giving similar resources to the other side? 

What would you do to certain challengers who were supposed to 

get resources, and what has the SEC done to make sure that the 

challengers have equal space in the proxy statement which is the 

one document you do control? 

Mr. BREHENY. Thank you, Congressman. That exact issue was 

the point that the Commission took up on May 20th. And as you 

may know, this is the third attempt that the Commission has made 

to give shareholders, who have a State law right to nominate directors, the ability to have those nominees included within the company’s proxy material. 

So the issue about disclosure and the ability to provide disclosure 

about their nominees is all included, and that rule proposal is up 

on the Commission’s Web site as of last night. 

31 

Mr. SHERMAN. I would hope that you would propose legislation 

that would go far beyond the proxy statement. Trust me, it is a 

very boring document. What is needed is equal amounts of, and in 

some cases millions of dollars to call shareholders and try to get 

their proxies, and that process needs to be equal. My time has expired. 

Ms. WATERS. Thank you. 

Mr. Garrett. 

Mr. GARRETT. Before I go to my questions, let’s go back to the 

opening of the hearing where the chairman was talking about history and how history is relevant. Indeed, it is. More the pity that 

revisionist history is not relevant. Yes, there were some Republicans on this side of the aisle just now repudiated what the past 

Administration did with a lot of the bailouts. Unfortunately, the 

chairman and others were not repudiating it when it was going 

through the House. And you will remember, as some said, the 

chairman carried the water for the past Administration to make 

sure that legislation was not only engaged in and made sure that 

the TARP legislation actually passed. And we must also remember 

that history tells us that this new Administration has basically 

adopted hook, line, and sinker the past Administrations of the bailout philosophy. 

So, yes, there are a number on this side of the aisle who repudiated in the past, and on the other side of the aisle maybe there is 

one that I see who joined with us in that fight against the TARP 

bailouts and all of the string of bailouts that followed. So let’s remember what history was. 

I also see we have the counselor to the Treasury Secretary here 

with us. Remember also that Mr. Geithner at that time was with 

the New York Fed, and at that time the New York Fed was considered the architect of the AIG bailout and this Administration 

adopted Mr. Geithner as their Treasury Secretary. So I think there 

is the pity that this Administration is continuing on in the mold 

and continues on with the bailout and that is what a number of 

us thought was wrong then and continue to fight against now with 

our legislation and what we will roll out later on. 

With history now clarified, Mr. Alvarez, I see in your testimony 

you say that employees throughout a firm who expose a firm to significant risk, and improperly designed compensation programs 

might incite a wide range of employee behavior. You also say we 

should adjust compensation so that employees bear some of the 

risks associated with their activities. An employee is less likely to 

take an imprudent risk if incentive payments are reduced or eliminated for activity that imposes higher than expected losses. I agree. 

How does that occur in the Fed right now with the activities that 

the employees take that have a risk not only on themselves but the 

entire economy? Or can they do anything that they want without 

any risk? 

Mr. ALVAREZ. There is no one at the Fed who can do anything 

that they want without taking risk. 

Mr. GARRETT. As far as their compensation? 

Mr. ALVAREZ. No, as far as their actions as well. So there is performance. At the Federal Reserve, there is a tie between performance and pay. We are all rated on our performance, and we all 

32 

have adjustments to our pay based on our performance. We are not 

paid with bonuses like the way the industry is that we are talking 

about today. 

Mr. GARRETT. For all of the panel, looking at the proposal that 

is coming from this Administration that the chairman is talking 

about, some would suggest that the proposal would have higher 

cost for businesses to operate. Most would agree with that. Some 

would argue that larger corporations could probably bear that cost. 

Others would argue that may be the case, but smaller firms would 

have difficulty dealing with those pretty significant additional expenses. Does anyone have a comment on how smaller firms would 

have to deal with these costs to the operation? 

Mr. ALVAREZ. I would say that smaller firms actually do a better 

job of aligning risk and rewards than the larger firms do in part 

because typically in a smaller firm the CEO, the CFO if there is 

one, knows the employees, knows the risks that are coming onto 

the balance sheet, knows what the employees are doing, and so is 

able to adjust the compensation practices. 

Mr. GARRETT. If we set up any additional requirements as far as 

outside requirements, doesn’t this add to the cost of them doing 

business? Will they be able to absorb that? 

Mr. ALVAREZ. I will defer to the others on theirs, but the kind 

of approach that the Federal Reserve is considering is outlining 

principle. 

Mr. GARRETT. Thank you, Mr. Alvarez, I appreciate that. And I 

ask Mr. Sperling on the Administration’s proposal? 

Mr. SPERLING. The two proposals that Secretary Geithner put 

forward, the say-on-pay and the independent comp committees, I 

don’t believe would have a significant cost. It would obviously apply 

to public companies. It doesn’t mandate that there is—it does not 

put a mandate. It says if you are a comp committee, if an independent comp committee is going to hire a consultant or counsel, 

that committee needs to have the authority and funding to do their 

job without conflicts of interest. 

I feel the things that we have put forward right now would be 

affecting public companies, but I share your view that one always 

has to do an analysis of what the differential impact would be. 

Ms. WATERS. Thank you. 

Mr. Moore. 

Mr. MOORE OF KANSAS. Thank you, Madam Chairwoman. Before 

we learned about the $165 million AIG bonuses in March, we also 

learning from New York’s comptroller in January that Wall Street 

executives were paid $18.4 billion in bonuses last year. I was troubled by this news, especially during a national emergency when the 

Federal Government is providing billions of dollars of taxpayer 

funds to stabilize the financial sector. Under normal circumstances 

I don’t believe, and I think most of the American people don’t believe, that we, Congress, should be involved in any way in setting 

executive compensation or compensations for board of directors of 

shareholders. We shouldn’t be setting those salaries. But we are 

not in normal circumstances, and that is why I filed H.R. 857, the 

Limit Executive Compensation Abuse Act, which for TARP recipients only would have limited the annual executive compensation to 

33 

the same level of compensation that the President of the United 

States gets paid, $400,000. 

Mr. Sperling, do you believe compensation practices can pose a 

systemic risk or jeopardize a firm’s safety and soundness? How 

should Congress guard against risks to the financial system without stifling reasonable compensation practices? 

Mr. SPERLING. I think we have learned the hard way that they 

can contribute, and I think it has been part of the discussion that 

we have had today. 

And I do want to say that we often do mention or use the examples of the extreme cases or where people were truly bad actors. 

But a lot of the danger comes from building systems where even 

good people are not given the right focus. We talked before on the 

whole practice from the origination of subprime mortgages to their 

packaging to their sales. You almost have a chain of financial 

transactions where you were paid by fees by the volume of what 

you did, and then you either externalized it to the firm or kind of 

moved it on to the next person. Of course, what happens is when 

you are in kind of a bubble, an asset bubble situation, the people 

who are being cautionary start looking like they are overly risk adverse. And the people who are being reckless starting looking wise 

and right and making good money. 

That is exactly why a company has to believe in risk management, and it has to be something that they do throughout the system, and they have to empower that person that even when the 

going is getting good, why was it. In firms throughout the financial 

industry, there was so little effectiveness of risk management when 

there were no shortage of people writing that there was a potential 

housing bubble. Perhaps people didn’t realize the degree, the depth 

of what we would go through, but there was a problem. 

So I do think that companies have to believe in strong risk management, and they have to empower their risk managers. They 

have to have the stature and independence to stand up even in 

good times and say yes, this practice has worked the last few years; 

but when we look at the underlying value of what is happening, 

we think that we are creating risks in the outyears for our company, our shareholders, and the economy as a whole. 

Mr. MOORE OF KANSAS. Thank you, Mr. Sperling. 

Mr. Alvarez, do you have any comments. 

Mr. ALVAREZ. The only thing I would add is that the industry 

recognizes that there was systemic risk, and risk to the health of 

the firms through the compensation practices of the past. 

If you recall 15 or 20 years ago, there was quite an effort to just 

get pay tied to performance as a beginning spot. And so the methods that were used to tie pay to performance have shown in this 

crisis to have flaws to it. I think everyone is recognizing that, and 

so it is an opportunity. We have an opportunity now to make some 

strides to improve the health of the system and firms individually. 

Mr. MOORE OF KANSAS. I thank you. My time is up. 

The CHAIRMAN. The gentleman from Florida. 

Mr. POSEY. Thank you, Mr. Chairman. I am still trying to figure 

out what would make some of the compensation boards or committees recommend the incredibly high compensation that they did 

when it was clear that the ship was on the rocks and it was going 

34 

down. How did the compensation laws that we have now, if they 

do, how do they affect gifts between, say, a CEO of a company and 

members of the compensation board? 

Mr. BREHENY. Thank you, Congressman. The SEC’s rules have 

quite a bit of requirement with regards to disclosure about conflicts 

between members of the compensation committee and other executives of the company. In fact, it is a New York Stock Exchange, a 

listing company requirement, that today, compensation committee 

members have to be independent. And those rules are quite extensive. I think what you are hearing from my colleagues on the recommendations that were made yesterday was to increase the independence of the members of the compensation committee beyond 

what they currently are today to restrict all sort of connections between compensation committee members and the board. I think we 

are looking at heightened compensation. 

But there is an independent requirement today and there is 

quite a bit of disclosure already required under the SEC’s rules. 

Mr. POSEY. Have you ever found that to be violated in the history 

of the SEC or the law? 

Mr. BREHENY. Unfortunately, I don’t have that information to 

give you a thoughtful answer. I would be happy to look into that. 

Certainly the Commission takes its authority to enforce the rules 

with regards to violations of disclosure rules or other rules very serious, but I would be happy to get back to you with information 

about that. 

Mr. POSEY. Mr. Alvarez and Mr. Sperling, why do you think they 

would pay out such incredibly high bonuses when they see the ship 

is on the rocks? 

Mr. ALVAREZ. I think one reason is what we call a collective action problem: No one wanted to be the first to rationalize bonuses 

for fear that they would lose their best talent. That is actually one 

of the reasons why we as supervisors can be helpful here by increasing the priority of the board of directors and the management 

to pay attention to the incentives in compensation, helping to outline best practices and good principles. 

We can push the whole industry to act together. In that way, 

there is a little bit of safety. Then there is less concern that an institution that does make the proper adjustments, does, for example, 

take away bonuses when performance is poor, won’t be left as the 

only one doing it, and that will improve the practices of everyone. 

Mr. POSEY. Do you think it would make any sense just to impute 

some culpability to stockholders in their losses if you act poorly like 

this? That opening the exposure to liability could be just as effective? 

Mr. ALVAREZ. Shareholders already do share. When there are excessive bonuses paid to executives, that is costs that are borne by 

shareholders. 

Mr. POSEY. When was the last time you are aware that was utilized? 

Mr. ALVAREZ. It is reflected in decreasing in the price. 

Mr. POSEY. I understand in theory. But most stockholders that 

I know, and they are small investors, not big investors, they think 

that these humongous bonuses are just a necessary evil and there 

is nothing they can do about them, it is just as bad one place as 

35 

another. Everybody is misbehaving. They are not going to find anything better to their bottom line if everybody is misbehaving to the 

same extent and nobody has done anything about it; and, quite 

frankly, I don’t believe that you are going to be able to regulate 

people into doing the right thing. I think that just holding them 

more accountable individually and personally liable and accountable would just make a little more sense. Mr. Sperling? 

Mr. SPERLING. I actually think the proposals we are talking 

about would be effective. I agree with Mr. Alvarez that there is a 

bit of—and you see this in the whole way that the compensation 

consultants work. There is less of is this fundamentally sound, fundamentally good for the shareholder, and more how does it compare to the practices of your peers. And so you do get a bit of a 

collective action problem where people simply say our five competitors do this, and that becomes the beginning and end of the discussion. 

I think that empowering compensation committees, but also the 

say-on-pay, bringing this to light, does have a powerful deterrent 

impact. The U.K., and even the study from the Harvard Business 

School, which was a little more skeptical, said its positive effect 

was in deterring high payouts to those who clearly performed poorly. 

The CHAIRMAN. We have a vote, so we will take a break after Ms. 

McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I appreciate that. 

Many years ago, my husband worked on Wall Street. He started 

on Wall Street when he was 17, and he worked his way up and he 

worked for a very large financial service company. 

He was in compliance, and he had the whole northeast corridor 

to go to all the little offices to make sure that they were complying 

with the FEC rules, but also for the company rules. And he always 

found it amazing because he never announced when he was going 

to be there that he would go into an office and allow them, obviously to follow all the rules and regulations, no problems. But there 

were certain offices that did not follow those rules and regulations 

and he would write them up and then make another surprise visit 

back to see if they cleaned everything up. They did not. And that 

is when they got in trouble with the company. And these were usually large—well, large offices that produced a lot of money for that 

particular location. 

And I think when we talk about why we are here today, and 

even talking about what we are doing, I think people have forgotten that we are here because the companies did what they did and 

they are trying to get their reputation back now. The banks have 

to get their reputation back now, the financial services have to get 

their reputation back. People do not trust them yet. And it is our 

responsibility as the government to try to protect our constituents. 

They lost trillions of dollars. People are hurting and they are still 

hurting. We are happy to see that things are starting to go forward, I believe, because of what the government did that the markets are starting to stabilize, we still have a long way to go on 

housing. But it is because what we did do. 

36 

With that being said, and I have to say also for my colleague 

when she mentioned Kenneth Feinberg, he is great, I worked with 

him, unfortunately, with an awful lot of my constituents who lost 

somebody on 9/11, and I think it was a great choice. But I will go 

back to one of the articles—by the way, that was another thing in 

the article. Already—this Wall Street today. Already, many on Wall 

Street are beginning to voluntarily change their pay practices 

through—though it remains to be seen how long. That is another 

reason on why we are doing what we are doing today and hopefully 

for the future. But my question to you would be, could you expand 

on what is considered exceptional assistance? I actually don’t understand that part. 

Mr. SPERLING. The easiest way to describe it would be that in the 

previous Administration, they set up the Capital Purchase Program. And this was expanded to all banks. So even smaller banks 

can come in. And the idea was to try to give more banks the capital 

so that they were in a stronger position to lend, not because we 

were concerned about each of those banks, but because we felt collectively if there was stronger capitalization of the banking system 

there would be more lending and that would be good for the economy. An individual bank might say, do you know what, we are just 

going weather this storm by not lending, we are not going to make 

much money but we will get through it. But for us we know that 

if 5,000 banks all do that at the same time that means there is 

going to be less small business lending and there is going to be less 

growth and this recession will last longer. 

So that is a generally accessible program. And the people who 

come to it don’t necessarily come because they are weak, they come 

because we have a policy goal of wanting banks to have more capital. Compare that to perhaps Citigroup where they require government assistance for their fundamental financial stability. And because of their importance to the overall financial stability, the economy, because of our desire to not let something like Lehman Brothers again happen, we make an exceptional effort, we make an exceptional assistance that they get that is not available to their 

peers and it is not based on a general goal, it is based on an exceptional intervention to assist them essentially in their fundamental 

financial stability. That is a very different situation. And while I 

could give you—and I think that principle is one people understand. 

I think people understand that there is something different about 

AIG and Citigroup and GM than their community bank that takes 

more capital in the capital purchase program. And I want to make 

clear, the law of the land that was passed in the Recovery Act applies to everyone, so the restrictions on bonuses. We added provisions on luxury expenditure, on say-on-pay, on having to write in 

a narrative way what your risk analysis is. But we were not as intrusive in those situations because many of those banks are the 

community banks in your district where you are giving taxpayer 

dollars to a company that would have gone into bankruptcy if they 

were not systemically significant we feel a higher obligation, and 

that really is, in many ways, the fundamental task. 

Mrs. MCCARTHY OF NEW YORK. My husband actually believed 

nobody should get bonuses, just get a good paycheck. 

37 

The CHAIRMAN. We are going to return with this panel, and I am 

going to call on the Democratic side only those members who are 

here and did not yet get to ask questions. New members will get 

to question the second panel. So the five members here who didn’t 

get to ask questions will be called on to finish this panel, and we 

will then get to the next panel. If one or two Republicans show up, 

we will do that. We should be gone for not more than 25 minutes. 

There are only two votes. Most of the time is gone on one of them. 

We will be back as soon as we can. I thank the panel for waiting. 

[recess] 

The CHAIRMAN. Mr. Scott of Georgia is recognized for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. I want to say two things 

at first, because I think that from our various conversations during 

the first part of the hearing, just to make clear, we are all capitalists here, we believe strongly in the capitalistic system. The reason 

this committee is moving and exploring this issue is because we 

care about the capitalistic system. And the capitalistic system is 

not manifested just with CEOs, it is not structured to take care of 

them first. The capitalistic system is geared with public interest, 

it is geared with shareholder interest. What we are concerned with 

here, particularly in the financial sector, is the health of our economy. At the heart of the health of our economy, the heart of it is 

basically our financial services industry. 

And so what we have here in dealing with this issue of compensation and the role it plays in systemic risk is that there is 

some valve clogging going on. And we need to examine this so that 

this heart, the heart of our system, the financial system, does not 

endanger itself with a heart attack. Clogged arteries bring that, 

and we do have a clogged artery here. It is clear that excessive 

compensation has played some degree and some contributing factor 

to our financial situation. 

I think what we are trying to do here is on two levels. One, we 

have to respond to companies like AIG and others that come and 

ask for the taxpayers’ money to help them. We have to make sure 

we are good stewards of that taxpayer dollar, to make sure that 

compensation is in line. And it is clear to anybody with any ounce 

of caring about the capitalistic system that giving the $168 million 

in bonuses and compensation of taxpayers’ money to a failing company asking for a bailout was excessive. 

But what it did was it opened us up to a realization of perhaps 

this compensation issue, this heavily unbalanced structure between 

bonuses and salaries certainly had some risk involved. Excessive 

compensation packages were indeed a contributing factor because 

incentives for short-term gains overwhelm the checks and balances 

that were meant to mitigate against the risk of excessive leverage. 

So the question is how can we better align our compensation packages with sound management risk that properly measure reward 

performance. It is sort of like Scott Burroughs here with some of 

these CEOs where they have gone and cut deals regardless of performance. 

So you are paying some of these CEOs as if there were 350 point 

hitters hitting 50 home runs when they are 220 hitters, no performance. So I think that what is wrong with having shareholders 

to be able to have a say in these packages. Now, we have an excelVerDate Nov 24 2008 16:38 Nov 05, 2009 Jkt 052398 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\52398.TXT TERRIE
38 

lent run company in my State of Georgia, Aflac, that has done this 

with great success. Shareholders want to see that their leaders, the 

people who are running the companies, they have the best talent, 

but they certainly want to make sure they perform. 

So we have excellent examples here of shareholders who are taking part in that. But I just wanted to make sure that is clear. But 

my question, Mr. Chairman, before my time runs out, is just a comment from each of you is how can we better align our compensation 

packages with sound management so that they properly measure 

pay for performance. And what is wrong with having shareholders 

have a say, not the government, not us, but the people who own 

that company, they ought to have a say in what these people are 

being paid, particularly their hired guns with contracts. 

The CHAIRMAN. We have time for one answer. 

Mr. SPERLING. I truly think the say-on-pay is a situation of all 

upside, no downside. You are empowering shareholders with the 

ability to have stronger oversight. You are forcing the company to 

think more seriously about what they do, how it will be perceived 

and not just to go on automatic pilot doing practices that are not 

defensible simply because of their peer group is doing it. All I 

would say kind of quickly, knowing we have time issues, is that I 

think that you need some type of, some type of long-term compensation or something that at least makes you internalize some 

of the risks that you are creating so you do not get entire industries or entire sets of employees who are all being paid by volume 

based on fees and nobody in the process is looking at the underlying value or the long-term risk. And then I think the hard part 

for all of us is that we don’t simply create a world where everybody 

is out saying, yes, pay for performance, and we haven’t really 

looked carefully whether the performance we are now blessing is 

subject to manipulation itself. And I think that is going to mean 

more complex, more careful, mixes of metrics. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. Mr. Chairman, I thank 

you for your leadership. It has been said that managers want to 

do things right and the leaders want to do the right thing. I think 

we are doing the right thing. And I would like to have just a moment of soliloquy because I would like to speak for many persons 

who are not here to speak for themselves. 

I want to speak for the autoworkers. I speak for them because 

today there seems to be some debate as to whether or not we 

should endeavor to make some adjustments with reference to executive compensation in terms of how it can promote excessive risktaking. And the autoworkers have had their salaries maligned, 

they have been castigated for making too much money. And it is 

unfortunate that there are those who would want to limit the salaries of autoworkers, but would take a firm stand against making 

any endeavor to look into whether or not excessive risk by way of 

salary has driven some of this adverse, these adverse market conditions that we have. I have before me evidence of a bill, H.R. 7321, 

which proposed requiring the employees of Ford, GM, and Chrysler 

to receive the same compensation, or nearly the same as Nissan 

and Volkswagen. It just seems to me that those who would sponsor 

39 

this kind of legislation would find it in their hearts to see that we 

can look into the type of legislation that we are considering today. 

I have evidence of H.R. 5 which passed the House in 2005 which 

would have placed a cap on the percentage of damages that lawyers can receive. It would have capped them at 15 percent of any 

fees over $600,000. A lot of money. Not nearly as much as what 

some others are making, however. And it just seems to me that if 

we can cap or try to cap and cap the fees of lawyers who represent 

consumers, we can also look at lawyers who represent corporations. 

Those who are not here today, I just believe they want this said, 

because there are people who are suffering who have had their salaries cut who work in the auto industry. And these are people who 

are not getting bonuses that they use to buy second and third 

homes or to buy additional cars. 

What they lost was money for education, money to pay house 

notes, money to sustain themselves. And I find it quite frankly disenchanting to know that there are those who would want them to 

receive cuts and not want us to look at the compensation that these 

executives are receiving that can create excessive risk in the marketplace. So I thank you, Mr. Chairman, for giving me this moment 

to voice the concerns of those who are not here, the blue collar 

workers and the lawyers who represent the consumers who have 

gone to battle for them and made a difference in their lives and in 

the lives of people in this country by causing us to have products 

that are safe by virtue of knowing that there are these lawyers who 

will take on these challenges and make sure that the consumer is 

protected. Consumer protection is important. We had one of the 

best consumer protection systems in the world, and it did not cost 

the government one penny because we had lawyers who were willing to stand up for those who could not stand up and speak up for 

themselves. 

And it is very unfortunate that we choose to regulate these lawyers, but we don’t regulate—don’t see the need to regulate lawyers 

who are creating excessive risk who work for corporations. I don’t 

want to see anybody’s salary cut. I don’t want to see anybody’s salary regulated. But the American people understand that something 

wrong has happened, and they want to see us do something about 

it. And that takes leadership. We can’t just manage this problem, 

we have to show some leadership and make the necessary changes 

to eliminate this excessive risk-taking that created much of the systemic problems that we have had to contend with. I yield back. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Colorado, then the gentleman from Missouri. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. Just a couple of questions and comments. My friends on this side of the aisle have expressed a lot of what I am feeling. And even my friends on the 

other side of the aisle who could be the greatest laissez-faire capitalists in the world have to question when there is such a serious 

divide between management and ownership. And I will take Quest, 

which is a big company in Colorado. Quest, one of our CEOs, he 

has now gotten himself in trouble, got $148 million, all right. Now, 

this is comparing apples and oranges, but the governor of the State 

of Colorado gets $90,000. And most people make $50,000 to 

40 

$200,000 in Colorado. How is it that an executive gets $148 million. 

I mean how does that pay come about. Mr. Sperling, can you—I 

mean how does anybody approve that kind of salary for anybody. 

Mr. SPERLING. Well, I am—I don’t know your specific, the specific 

case. But I will say one thing, and again you have some excellent 

experts coming on, which is one of the things that, you know one 

of the things that disturbs me is whether or not retirement golden 

parachute type of payments are somewhat promoted because they 

are less transparent. People do not know the walk-away value of 

what a CEO may have until that moment. 

Mr. PERLMUTTER. Let me give you one that maybe you are familiar with, or maybe the other panelists. Because I appreciate giving 

some more teeth to the compensation committee, but I mean, there 

still is a divide between the owners of the company and the management, and maybe the owners rein it in. That is laissez-faire capitalism. Let’s take Angelo Mozilo, Countrywide Financial, who has 

been involved in a lot of the troubles potentially that we have 

today. His salary was $102 million, $102 million. Are the owners 

of Countrywide actually having a say in what he is making? I 

mean, if I am the owner of the company, I am going to want that 

in my pocket as a dividend. Do you think your compensation committee approach really gives those owners the strength that they 

need to say no, that is too much? 

Mr. SPERLING. Well, I think the case you just mentioned goes to 

the heart of the pay for performance. I think there has been nothing that so promotes the sense of double standard that I mentioned, and I believe you are mentioning, than the extraordinary 

cases of huge sums for CEOs who have failed. And the juxtaposition between workers losing their jobs, seeing pensions cut with the 

failed CEO, receiving enormous amount of sums as they leave having failed, I think is very destructive to the kind of public trust in 

our financial system. And so I think it really—I think it goes to almost the heart of everything we are talking about. How do you ensure that there actually is pay for performance. And I think part 

of that is actually shining a spotlight on whether people are just 

doing compensation based on what their peer group is, whether it 

is acceptable to have these kind of compensation packages that 

allow this when there has been no performance. And you know I 

am heartened a little bit to see that I saw that a couple of the companies who were just paying back their TARP without any push 

from the government, but I think because of this focus, put out 

statements saying they are just going to do pay for performance, 

they are going to give most of the compensation and stock to be 

held for a long time and they weren’t having any golden parachutes. So I think this goes to the heart of almost everything we 

are talking about. 

Mr. PERLMUTTER. All right. Just one more question. When we 

say pay for performance, is that going to be tied to like the stock 

market, because that is a problem in and of itself. 

Mr. SPERLING. You are absolutely right. I mean, former Chief of 

Staff Erskine Bowles was the first person who told me that when 

he was at Wall Street, his boss used to always tell him never confuse brains for bull market. 

Mr. PERLMUTTER. Exactly. 

41 

Mr. SPERLING. So, yes. I mean, the idea that performance is simply a stock price I think it works bad both ways. It rewards amazing awards for people that has nothing to do with their performance; just the overall economy is getting better. On the other hand, 

I don’t have a problem with rewarding an executive who is doing 

an exceptional job in a terrible economic time. But you don’t see 

that symmetry. The sense is that people get paid a lot when they 

fail; they get paid when they succeed. Chairman Frank was in the 

paper the other day, heads you win, tails at least you don’t lose, 

on these packages. But I do think one of the key points is just tying 

to stock does have its risk. I know some of the experts we have 

talked to have said, you know, be careful, don’t make that a onesize-fits-all, because if I accumulate all of my funds in stock, I have 

huge stock holding, and am allowed to take it as soon as I retire, 

well, that could create again for a corporate CEO a strategy to do, 

strategies about raising their stock price as they leave. So it is 

helpful but it is not one-size-fits-all. 

Mr. PERLMUTTER. Thank you. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Mr. Chairman, I associate myself with the comments of Mr. Perlmutter, and I will forego any questioning and 

wait until the second panel, or I will yield to one of my colleagues 

on the other side. 

The CHAIRMAN. Well, that concludes this panel. And we will call 

the next panel. Thank you all very much. As the next panel comes 

forward, they do so with my apology. We have a terrible problem 

with the size of this committee. I am going to experiment with new 

rules. This is a very important panel, and I appreciate and look forward to learning from them. We may have to do 2-day hearings so 

we have one major panel a day. We will be monitoring this. This 

is a panel that deserves some attention. You will get it. I apologize 

for the fact that some of us are going to have to be in absentia. 

Let’s move quickly here people. Thank you. We will send out the 

word for our missing witness. And we will begin with a return witness who we have appreciated having before us, Nell Minow. 

STATEMENT OF NELL MINOW, EDITOR AND FOUNDER, THE 

CORPORATE LIBRARY 

Ms. MINOW. Thank you very much Mr. Chairman. This is, I 

think, my fifth or sixth time coming before the committee, but the 

first time you spelled my name wrong. So I would appreciate it if 

we could correct that in the record. There is one ‘‘N’’ in Minow. 

The CHAIRMAN. Yes, we will do that. We just wanted to differentiate you from the big fish you will be discussing. 

Ms. MINOW. Okay. I appreciate that. Thank you very much. Mr. 

Chairman and members of the committee, I am in the enviable, 

and, in my experience, unprecedented position of agreeing with 

both sides and with most of the comments that have been made 

here today. But I think it is a mistake to say that we object to the 

government getting involved in compensation. The government is 

already deeply involved in compensation, often inadvertently. And 

one of the things that I want to talk about today is removing some 

of the inadvertent obstacles that we have to having optimal pay. 

The markets and the government have both failed here. 

42 

The primary role of the government is to get out of the way of 

the market and remove obstacles to the kind of oversight that capitalism requires. Bad pay is a risk factor, and I was very pleased 

to hear the earlier panel talk about that, and that the Fed will now 

look at it. But where are the other people who are supposed to be 

looking at risk in the markets? The rating agencies, the securities 

analysts, the DNR liability insurers and the journalists. And it is 

also important to stop saying that the company pays the CEO this 

amount of money or that amount of money, it is actually the boards 

of directors, and we need to put the focus on there. And in theory, 

as we talked about with the last panel, it is the shareholders who 

elect the boards. But if you are going to give them say-on-pay and 

some of these other rights that you are talking about, proxy access, 

you have to make sure to remove the obstacles to their carrying it 

out. 

And our report shows that shareholders fail tremendously most 

of the time, and that independence is as important on the shareholder side as it is on the board side. As I prepared my testimony, 

which I am not going to summarize because it is in the record, I 

felt a little bit like Dickens; I was talking about the ghost of compensation past, present, and future. And I want to really focus on 

what is going on now, because I did disagree with the statement 

made by Mr. Alvarez about the fact that they have gotten the message. In fact, what we see is that we have particular concerns 

about efforts to circumvent even the preliminary constraints already imposed. Executives will always be more motivated and agile 

than regulators and legislators. With regard to pay structures, I 

support indexed options, claw backs, banking of bonuses. With regard to boards of directors, it is very important that they have the 

vulnerability to remind them who they represent; that they can be 

removed if they don’t represent shareholders. And with shareholders, I really want to focus on the collective choice problem, 

what is called by economists rational apathy and suggest possibly 

the appointment of independent voting fiduciaries. Finally, the billions lost in the financial market meltdown are dwarfed by the loss 

of reputation and the brand of American financial markets. I am 

a passionate capitalist myself, and I hope that this committee will 

work to restore the credibility of our system of capitalism by removing obstacles to the role of the market and establishing optimal 

compensation. Thank you very much and I look forward to your 

questions. 

[The prepared statement of Ms. Minow can be found on page 161 

of the appendix.] 

The CHAIRMAN. Thank you. I apologize, but our Administration 

at the last minute has raised some issues with me about some 

other things they should have raised before, and I have finally told 

them to forget about it and show a little more consideration and 

I apologize that it spilled over on you. Another returning witness, 

Mr. Lucien Bebchuk. 

43 

STATEMENT OF LUCIEN A. BEBCHUK, WILLIAM J. FRIEDMAN 

AND ALICIA TOWNSEND FRIEDMAN PROFESSOR OF LAW, ECONOMICS, AND FINANCE, AND DIRECTOR, CORPORATE GOVERNANCE PROGRAM, HARVARD LAW SCHOOL 

Mr. BEBCHUK. Mr. Chairman and distinguished members of the 

committee, one major factor that has induced excessive risk-taking 

is that firms reward executives for short-term gains. Although the 

financial sector has lost more than half of its stock market value 

during their last 5 years, executives are still able, during this period, to cash prior to the implosion large amounts of both equity 

compensation and bonus compensation. Jesse Fried and I warned 

about this short-term distortion in a book titled, ‘‘Pay Without Performance’’ that we published 5 years ago. And following the crisis, 

this problem has now become widely recognized. To tie compensation to long-term performance, executives shouldn’t be allowed to 

cash out options and shares for several years after vesting. And 

similarly bonuses should not be cashed right away but should further be placed in an account for several years and adjusted downward if the company learns that the reasons for the bonus no 

longer hold up. 

In addition to the short-term as a problem, bank executives had 

a second and important source of incentives to take excessive risks 

that thus far has received little attention. The payoffs of bank executives were tied to highly leveraged bets on the value of a bank’s 

capital. Compensation arrangements tied the interest of executives 

to the value of common shares in the bank holder company or even 

to the value of options on such shares, and as a result, executives 

were not exposed to the potential negative consequences that very 

large losses could have for preferred shareholder bond holders and 

the government. This gave executives the incentive to give insufficient weight to the possibility of large losses and therefore gave 

them incentives to take excessive risks. To address this distortion, 

the payoffs of bank executives could be tied not to the long-term 

value of a bank’s common shares, but to the long-term value of a 

broader basket of securities which should include at least the 

bank’s preferred shares and bonus. Now, let me turn to what role 

the government should play. For nonfinancial firms, the government should avoid intervening in the substantive choices that firms 

make, but the government should see to it that shareholders have 

adequate rights. 

And as I testified before this committee 2 years ago, the rights 

of shareholders in U.S. private companies are much weaker than 

in other common-law countries. We need to introduce say-on-pay 

votes to strengthen shareholder power to replace directors, and 

shareholders should also have the power to amend the corporate 

charter and to change the company’s state of incorporation. 

Finally, in the case of executive pay in banks, or more generally 

any financial firms that pose systemic risks, here the government 

should have a broader role. This is necessary for the very same 

moral hazard reasons that provide the basis for the traditional regulation of bank activities. The interest of common shareholders of 

banks are served by having investment, lending, and capital decisions that are riskier than is desirable for the government as the 

44 

government to have deposits. That is why traditional bank regulation monitors and regulates these decisions by banks. 

By the same token, the interest of common shareholders in banks 

may be served by giving executives incentives to take risks that are 

somewhat excessive. Therefore, even if and when internal governance problems in banks are fixed, regulators should monitor and 

regulate executive pay in all banks regardless of whether they get 

public funding. The regulators should focus on the structure of pay 

arrangements, not the amount, and they should seek to limit the 

use of the type of incentives that have contributed to bringing 

about the current financial crisis. Thank you. 

[The prepared statement of Professor Bebchuk can be found on 

page 92 of the appendix.] 

The CHAIRMAN. Next, Mr. Lynn Turner, who is the former chief 

accountant of the Securities and Exchange Commission. 

STATEMENT OF LYNN E. TURNER, FORMER CHIEF 

ACCOUNTANT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. TURNER. Thank you, Chairman Frank, and thank you for the 

opportunity to be here today, and I applaud the leadership you exhibited in the past when the House did pass say-on-pay, and it is 

unfortunate that your colleagues in the Senate didn’t share the 

same wisdom. And so as they say— 

The CHAIRMAN. There is a lot of that going around. 

Mr. TURNER. —we are back. And the views I express today, I 

might add, are based upon not only my time as a regulator but perhaps more importantly I have been an executive setting compensation in a large international semi-conductor company, as well as a 

small venture start-up and served on the board of a Fortune 500 

company, as well as a small technology software company where 

entrepreneurship is very important, perhaps one of the few if not 

the only person at the table today with that type of experience and 

perspective. 

There is no doubt in my mind that when it comes to influencing 

people’s behavior in a company at the top level and at the low level 

there is nothing like pay that drives what people do. And when you 

give people pay that drives short-term performance, as we did on 

Wall Street where there was very low base and huge bonuses paid 

out on an annual basis, you are going to get the type of short-term 

thinking and short-term behavior all up and down the ladder that 

you turned around and got. You can’t avoid it. If you want longterm thinking and long-term shareholder value, you have to change 

that compensation scheme significantly, and that is up to the compensation committees to do. 

Unfortunately, today the compensation committees are all too 

comfy with the CEO. I have seen that on the boards that I have 

sat on. And they are very reluctant if not absolutely against really 

reining in the compensation. So we have to really put together a 

package that includes greater transparency, greater accountability, 

and some enforcement at the end of the day. So for the sake of time 

let me jump into some of the recommendations. I just would ask 

the chairman to include my whole written testimony in the record. 

The CHAIRMAN. Yes. Without objection, all of the submissions 

will be included in their entirety. 

45 

Mr. TURNER. In the area of transparency, I think we have to 

start with the SEC enhancing its disclosure of compensation arrangements. In particular, today they don’t require disclosure of 

the key performance metrics, the things that really drive how you 

get that package. So we don’t get the details on how Quest got to 

$148 million. We don’t get the factors, and we need to see those 

factors and require those factors be disclosed by the SEC. They 

made it voluntary a couple of years ago. About half of the companies give it, and half of the companies don’t. We need it from all 

of the companies on an appropriate level of detail. That includes 

we need to get back and figure out what the value of the real equity grants are when they are given. We have lost that. We need 

to have disclosure about the compensation consultants and whether 

or not they are truly independent, are they being hired directly by 

the comp committee or are they doing a lot of other work for members of management. 

I think we need to see transparency with how the investors are 

actually voting. We still have a lot of public pension funds, corporate plans, hedge funds that aren’t disclosing how they are voting on this stuff, and we need transparency to it. At a public pension fund I sit on, that has about $30 billion of assets in our State, 

we recently went to disclosing our votes just so all of our members 

and people can see how we vote, and we think that sets some accountability. 

If we don’t do it right, we are going have to explain why we do 

it the way we do it. There needs to be something done with the 

way shareholders vote. We can put in say-on-pay, and I certainly 

support that, strongly support that. And by the way, I don’t view 

that as government intervention in any way, shape or form. And 

to the question of whether or not that would drive people offshore, 

I absolutely don’t believe it will drive people offshore. Many of the 

other countries around the world; Australia, the Netherlands, 

many of the European, UK countries, many of the countries where 

there is the largest market cap already have that. 

So what are they going to do; leave here to go to another country 

with the same regime? I just think that is almost nonsensical. But 

we do need to get the shareholders and the mutual funds voting 

in the best interest of investors. As I say in my testimony, almost 

90 percent of the time the mutual funds; the Fidelities, the 

Barclays, the Alliances of the world are voting with management. 

And there is no requirement that they vote for their investors 

whose money they are managing as opposed to voting their own interest. 

And Fidelity, Barclays and these all manage a tremendous 

amount of money for these large companies with tremendous fees. 

That conflict is not disclosed. And it is shown time and time again 

they vote that way. So I certainly encourage say-on-pay, do something about the mutual fund voting, elimination of broker votes as 

the SEC has said they are going to do, I think we need to get to 

majority voting and the right for shareholders to also remove directors when they haven’t got the job done. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Turner can be found on page 188 

of the appendix.] 

46 

The CHAIRMAN. Thank you. Next, Professor Kevin Murphy from 

the University of Southern California. 

STATEMENT OF KEVIN J. MURPHY, KENNETH L. TREFFTZS 

CHAIR IN FINANCE, UNIVERSITY OF SOUTHERN CALIFORNIA, MARSHALL SCHOOL OF BUSINESS 

Mr. MURPHY. Thank you, Chairman Frank. We are here today in 

large part because we are all angry that Merrill Lynch and AIG 

gave huge bonuses to employees after receiving Federal bailout 

funds. Our anger, coupled with our suspicions say that the Wall 

Street bonus culture is a root cause of the ongoing financial crisis 

has led to an effective prohibition on cash bonuses for TARP recipients and is leading us today towards more sweeping regulation of 

compensation and financial services firms. I agree that there are 

problems with compensation structures in financial firms and in 

most other sectors, but it is my opinion that the constraints already 

currently on TARP recipients will likely destroy those organizations unless they can quickly repay the government and avoid the 

constraints. 

Moreover, it is my opinion that regulating compensation and financial services more broadly will cripple one of our Nation’s most 

important and historically most productive industries. The heavy 

reliance on bonuses has long been a defining feature of Wall Street 

compensation going back to the days when they were privately held 

partnerships. Such firms kept fixed costs under control by paying 

low based salaries and paying most of the compensation in the 

form of bonuses tied to profits. This basic structure remained intact 

when the investment banks went public, but the cash bonuses were 

replaced with a combination of cash restricted stock and options. 

The primary way that such structures can encourage excessive 

risk-taking is through asymmetric rewards and penalties. That is 

high rewards for superior performance and essentially no penalties 

for failure. Financial firms provide significant penalties for failure 

in their cash bonus plans by keeping salaries below competitive 

market levels so that earning a zero bonus is actually a penalty. 

And bonuses do fall in bad years. Average bonuses for executives 

in the TARP recipient firms were 82 percent lower in 2008 than 

in 2007. Take away bonus opportunities and the banks will have 

to raise salaries or find other ways to pay or they will lose their 

top talent. In addition to cash bonuses, executives in financial 

firms receive much of the compensation in the form of restricted 

stock and options, and these instruments also provide penalties for 

failure. 

The average intrinsic value of options held by executives in 

TARP recipient firms fell 94 percent from 2007 to 2008, and the 

value of their restricted stockholdings fell by 72 percent. And these 

statistics only include firms that continue to operate at the end of 

2008, thus ignoring the losses incurred by executives at Bear 

Stearns, Lehman, Washington Mutual, Wachovia and the other 

casualties of the crisis. Given the existing penalties for failure 

there is nothing inherent in the current structure that leads to obvious incentives to take excessive risks. To the extent that the 

firms indeed such risks we need to look beyond the pay structure 

to explain it. 

47 

In particular, the role of bonuses is likely dwarfed by the roles 

of loose monetary policies, social policies on homeownership, and 

poorly implemented financial innovation such as exotic mortgages, 

securitization, and collateralized debt obligations. 

Looking forward, I am especially concerned about offering toobig-to-fail guarantees that provide enormous incentives to take 

risks, but this isn’t a compensation problem. Another way that 

compensation can lead to risk-taking is through inappropriate performance measures. For example, consider mortgage brokers pay 

for writing loans rather than writing loans that borrowers will actually pay back. We saw this happen at Washington Mutual, Countrywide, Wachovia, and scores of smaller lenders who weren’t overly concerned about the default risk as long as home prices kept rising and as long as they could keep packaging and selling their 

loans to Wall Street. A solution to this performance measurement 

problem is to pay people to write good loans and penalize them for 

writing bad loans. The challenge is identifying a good loan without 

waiting up to 30 years to see whether the loan is repaid. The answer involves basing bonuses on subjective assessments of loan 

quality. 

Unfortunately, most current and projected regulations go in the 

opposite direction and require that bonuses be based solely on objective measures of performance such as the quantity of loans. The 

regulatory demands effectively substitute the judgment of government for the business judgment of the directors, and this is a dangerous path to go down. 

In conclusion it is not my opinion that current compensation 

practices are optimal. For example bonus plans could be improved 

by introducing and enforcing bonus banks and claw back provisions 

and making sure we reward long-term value creation rather than 

short-term results. And performance measurement could be improved by allowing more rather than less subjectivity and discretion. 

However, I believe that regulation will systematically and predictably make things worse rather than better. Indeed, Washington 

has a long history of attempts to regulate pay, including caps on 

golden parachutes in the 1980’s, the million dollar pay cap in the 

1990’s, more recent restrictions on FERC compensation and the 

most recent constraints on TARP recipients. Each of these attempts 

has created unanticipated side effects that have generally led to 

higher levels of pay and less efficient pay deliveries. I strongly recommend that the committee consider carefully this history before 

inevitably repeating the mistakes of the past. Thank you. 

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

169 of the appendix.] 

The CHAIRMAN. Thank you. Professor Verret. 

STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR, 

GEORGE MASON UNIVERSITY SCHOOL OF LAW 

Mr. VERRET. Chairman Frank, Ranking Member Bachus, and 

distinguished members of the committee, it is a privilege to testify 

in this forum today. My name is J.W. Verret. I am an assistant 

professor at George Mason Law School, and also a senior scholar 

at the Mercatus Center’s Financial Markets Working Group. I also 

48 

direct the Corporate Federalism Initiative, a network of scholars 

dedicated to studying the intersection of State and Federal authority in corporate governance. Before I begin, I also want to say that 

it is a particular honor to testify on a panel with Professor 

Bebchuk. He was my mentor and without his guidance, I wouldn’t 

be a law professor today, so that is a particular honor. 

Today, I want to discuss executive compensation proposals currently under consideration. I will also highlight a Wall Street norm 

of issuing and feeling pressure to meet quarterly earnings guidance, which is the central cause of short-term tunnel vision for 

Wall Street executives. The role executive compensation plays in 

the current crisis is in fact unclear. There is little difference, and 

this is key, there is little difference between the executive compensation approaches of banks healthy enough to repay their TARP 

funds and those of banks likely to need additional injections of capital. If executive compensation were the culprit the differences between executive compensation and healthy banks and executive 

compensation at bad banks would be much more apparent. 

What is apparent is that executive pay packages are of necessity 

complex. Compensation packages are designed to link pay to an executive’s performance running the company without rewarding or 

punishing executives for factors outside of their control. Regulatory 

restrictions and say-on-pay requirements may limit a compensation 

committee’s flexibility to achieve this important goal. There are no 

less than seven executive compensation initiatives either proposed 

or recently underway. Such a wide array of ideas from disparate 

corners offers to repeat the lack of coordination that contributed to 

the present crisis. The multitude of proposals also threatens to 

override two important SEC driven disclosure initiatives that offer 

some significant promise in this area. 

Former SEC Chairman Cox completed an extensive overhaul of 

executive compensation disclosure in 2006. And Chairman Shapiro 

is promising further changes. Congress should study the effect of 

these disclosures rules before instituting prescriptive regulation. I 

would also add that they should think about studying disclosure 

rules and the SEC should consider disclosure rules for proxy advisor firms, which is notably missing from the chairman’s current 

proposal. I would echo Professor Murphy’s warning about the effect 

of unintended consequences, and we have seen them before. In 

1993, lawmakers sought to limit the disparity in pay between executives and the average worker. The result was quite the opposite, 

in fact. Executive compensation increased exponentially, widening 

the gap between executives and the average worker. To offer an 

unintended consequence already apparent to the current reform effort pay restrictions had made it harder for American banks to retain talented executives. 

Immediately following the announcement of compensation restrictions by the Obama Administration, Deutsche Bank poached 

12 of Bank of America’s highest performing executives. And UBS 

used compensation increases as high as 200 percent, this is a Swiss 

bank, to hire away financial advisors from top firms. The greatest 

risk to the safety and soundness of the Nation’s banking system is 

not compensation but short-term thinking. Compensation is how 

companies may motivate executives to look short-term, but the real 

49 

question is why do companies pursue short-term goals in the first 

instance. The widely accepted convention of predicting quarterly 

earnings drives this short-term approach. Pension funds, mutual 

funds and company issuers all express dissatisfaction with the 

pressure to predict quarterly earnings. 

But companies feel that voluntarily opting out will be taken as 

a negative signal. Pressure to make quarterly predictions about 

their earnings companies frequently feel pressure to cut corners to 

meet those predictions. I would recommend that the Treasury Department lift executive compensation restrictions for those companies and banks that adopt a bylaw to prohibit quarterly guidance. 

If this committee wants to limit systemic risk it should not dramatically overhaul executive compensation structures. Instead 

focus on the destructive pressures caused by the prediction of quarterly earnings and give the SEC’s disclosure reforms time to work. 

I thank you again for the opportunity to testify and I look forward to answering your questions. 

[The prepared statement of Professor Verret can be found on 

page 209 of the appendix.] 

The CHAIRMAN. I will just begin. Mr. Murphy, one historic inaccuracy, you said we are here because of Merrill Lynch, etc. In fact, 

the Democrats on this committee raised the say-on-pay issue in 

2006, and in fact, the House passed say-on-pay in 2007 back when 

I thought TARP was what you used to cover the infield when it 

rained. So just historically, because it is not as you have suggested. 

Ms. Minow, let me ask, your general sense is that you simply 

have to make it less difficult to replace board members, that is the 

central piece, and that other things aren’t going to work out if you 

don’t have a board that is more sensitive. 

Ms. MINOW. Yes, I do think that is right. But you also have to 

have shareholders who are capable of exercising that authority. 

The CHAIRMAN. That is what I mean. The key is not say-on-pay, 

but say on board. 

Ms. MINOW. It is kind of a forest/tree thing. I think when we 

focus on compensation and we get down to the real fine details of 

whether options should be indexed or not or whether they should 

be tied to quarterly earnings or not, I think we are sort of missing 

the big picture here which is how it got out of whack here. 

The CHAIRMAN. Nothing that we are proposing would get to that 

level of detail. say-on-pay would do that. So you think say-on-pay 

is a step forward. But in the absence of the kind of—well, let me 

ask, because we will get to corporate governance later on. The current SEC proposal they just talked about with access, does that 

meet your— 

Ms. MINOW. I think that it is my opinion, I know the SEC doesn’t 

agree with me on this, so you are going to need some legislative 

clarity on that point, but yes, I think proxy access would be very 

meaningful, but I also support majority vote. 

The CHAIRMAN. Let me ask all of you compensation experts 

something that puzzles me. And that is we have the CEOs and 

other top decisionmakers telling us that part of the problem is that 

we have to align their interest with those of the company. Is there 

something about their character that is lacking that says that we 

50 

have to take extra steps to align their interest with those of the 

company. 

In the normal course of economic life we kind of assume that 

your interests will be aligned with the people who are paying your 

salary for the job you are doing. What is it about the financial sector that says the most highly paid members who have taken on 

these jobs who have, in fact, fought hard to get these jobs, that 

somehow they will not align their interests with those of the company unless we design special incentives. Couldn’t we expect them 

to have their interests aligned with the company even if there 

weren’t these incentive bonuses. Let me start with Mr. Verret. 

Mr. VERRET. Mr. Chairman, I think it is not about aligning the 

interest. 

The CHAIRMAN. No, excuse me. My question is the world may not 

be, a lot of things aren’t. The score of the Red Sox game is not 

about that. But my question is because one of the justifications we 

are getting for these forms of compensation is it is necessary to 

align the interest of these top decisionmakers with the interest of 

the company, and I don’t understand why they need that special 

set of circumstances when most of us don’t. 

Mr. VERRET. Well, Mr. Chairman, I appreciate your Red Sox reference. I am a Red Sox fan as well. I think the issue is risk, the 

essence is risk. And I think the question is, do we want them to 

swing for the fences or do we want them to only swing for the easy 

hits and wait to get walked. And sometimes, I think we want CEOs 

to swing for the fences. 

The CHAIRMAN. But if that is the right thing to do, why shouldn’t 

they be able to—why shouldn’t they do that because that is the 

right thing to do. By the way, I think to take the analogy, the answer is whether you swing for the fences or not would depend on 

the pitch, it would depend on the score, it would depend on the inning. If the bases are loaded and nobody is out in the last of the 

ninth, no, I don’t want you to swing for the fences, there are probably more effective, less risky ways to advance your goals. 

Mr. VERRET. Absolutely. 

The CHAIRMAN. You are evading the question, which is however 

you decide what the interests are, what is it that makes us have 

to give them some special incentive to put the company’s interest 

first? 

Mr. VERRET. Well, because as you know, some players like to 

take the easy way out and some players can take a risk for the 

good of the team. 

The CHAIRMAN. So you think that we have a—but we don’t usually do that with our employment system and with compensation. 

Let me ask the others, does anybody know what it is about chief 

executives of financial companies that means that they have to get 

special bonuses to align their interests? Mr. Murphy? 

Mr. MURPHY. And I will try to answer that question, but remember— 

The CHAIRMAN. If you are not going to try to answer that question then—excuse me, Mr. Murphy, I asked you a question. If you 

don’t want to answer it, you haven’t been subpoenaed, you can 

pass. Does anybody else want to answer the question Mr. Murphy 

didn’t want to answer? 

51 

Mr. MURPHY. Precisely the question is they say they want to 

align their incentives because of the human capital driven organization where they can go start their own firm with private equity 

and leave those firms. 

The CHAIRMAN. Well, first of all, when we do uniform things, 

leaving the firm thing is greatly exaggerated, particularly since 

American companies pay much more than most other companies. 

I haven’t seen all that reverse pay grade. But is that something 

then? Mr. Turner, would you want to try and answer that? 

Mr. TURNER. Yes, Chairman Frank. We all wished everyone 

acted in the same way. But my experience, and I have worked with 

many executives, including executives in financial companies, and 

some do put the shareholders and the company first and other executives put their own interest first and that is just people being 

people, and because of that we have to put a system in and in this 

country put in corporate governance. We know what we have put 

in to date hasn’t worked, the compensation committees haven’t 

worked. So in light of that, it is very reasonable to put in— 

The CHAIRMAN. No, I agree— 

Mr. TURNER. But not everyone is the same way. 

The CHAIRMAN. —except I think the lesson we have is that we 

have overdone this so-called alignment of interest, that we have 

overcompensated them to do what they should have been willing to 

do in the first place. And I think if you called their bluff, they probably would still keep doing it. The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. Mr. Verret, I was interested and intrigued by your testimony until you admitted you were 

a Red Sox fan. And I have no hope for the chairman, but you 

should know the Philadelphia Phillies are the world champions. 

You ought to think about who you are cheering for out there. 

Mr. VERRET. I understand, Representative Castle. 

Mr. CASTLE. One of the things you state in your writing, but you 

also mentioned in your testimony, the part that I heard, is the 

whole quarterly earnings pressure. We talk about the compensation issues, and I want to talk about that in a minute. But the 

quarterly earnings business concerns me. I don’t know if you have 

any ideas about how to change that. I mean, do we ask them not 

to publish anything or do it once a year or something to make it 

longer range? Because I am of a belief that is probably a greater 

driving force in the managing of a corporation that even the salaries are. And I am not sure how we should approach that. I am not 

sure we should approach it or the States should be approaching it. 

But the question I have is do you have any thoughts about any solutions to what a lot of us feel is a problem. 

Mr. VERRET. Well, I appreciate your question, Representative 

Castle, and I think the unique thing about this issue is this something that everybody agrees on. The U.S. Chamber of Commerce, 

the pension funds, the mutual funds all say, we hate quarterly 

earnings guidance. And companies, when we ask them privately, 

they say, we don’t like to do it either, but we feel pressure to do 

it. And we feel that if one of us were the first one to stop doing 

it, then everybody would say, oh, well, this is because obviously you 

have bad news about your quarterly earnings, that is why you are 

stopping. 

52 

Before this crisis hit, things were beginning to change. About 10 

percent of companies stopped providing quarterly guidance. Intel 

stopped and I think that Unical stopped, I know Berkshire Hathaway stopped. In fact, Warren Buffett said it is both deceptive and 

dangerous for CEOs to predict growth rates for their companies. I 

think that very clearly gives us his view. So it is already going in 

that direction. And I think that perhaps the focus on executive 

compensation is kind of stealing attention away from that important issue. And in terms of specific policy prescriptions, I would say 

I think that to the extent we want to lift the restrictions in TARP 

on executive compensation, I think it could be tagged. 

We could say if you are a TARP company but you adopt a bylaw, 

and a bylaw that is in accordance with and legal under your State 

corporate law obligations, a legal corporate bylaw, that says we will 

no longer provide quarterly earnings guidance, and boards can do 

that, then perhaps we could give it in some sort of a reward, a carrot rather than a stick under TARP because they have taken steps 

to limit systemic risk of their companies. I think that might be one 

way worth at least talking about. 

Mr. CASTLE. Let me shift back to the subject of the hearing today 

which is the executive compensation question, and just ask you 

about the governance of all that. I am concerned that the Federal 

Government is getting more and more involved in the running of 

corporations. In fact, we own corporations now which we don’t really want to do and hopefully work away from that. But that is 

where we are. We seem to be even going further in that direction 

with the various things that I am hearing. And the States, for 

years, have handled matters of corporate interest and corporation, 

etc. 

And my concern is that all of a sudden, we are asking that the 

Federal Government come in and override what the States may or 

may not do. And I am not saying they shouldn’t do anything. I 

think there are some executive compensation issues that should be 

addressed, but I would hope that the States would be the ones to 

address that. I would be interested in your parsing that issue in 

terms of what we as a Federal Government—Executive Branch, 

Legislative Branch—should do versus what should be done at the 

State levels, if anything, in the area of executive compensation. 

Mr. VERRET. Sure. To the extent that this discussion has gone towards proxy access and say-on-pay as prudent aspects of the executive compensation discussion, I think State law does play a very 

important role. With respect to proxy access, the SEC’s current proposal is very clear in that it says the Federal Government should 

say how proxy access should work, how State law nomination 

rights should work. And it specifically says if you want to exercise 

your State law rights you have to make sure that they don’t conflict in any way with what the SEC says is the one single approach 

to proxy access that we think should work for all of the over 4,000 

publicly traded companies in the United States. I think it is about 

4,000 is my guess. So I think that is an issue worth thinking about. 

And with respect to say-on-pay I think this is basically sort of an 

attempt to make a change that companies, that a small subset of 

shareholder haven’t been able to achieve through proposals. Just 

53 

last year, seven proposals for say-on-pay were introduced at companies in 2008, ten of them were successful. 

The average vote was a 60 percent vote against say-on-pay by 

the shareholders. At financial companies it is even higher. 70 percent was the average vote against say-on-pay at financial companies. So shareholders have at least—shareholders at the majority 

of companies in a very strong majority way have expressed dissatisfaction with say-on-pay proposals. 

Mr. CASTLE. I yield back the balance of my time. 

Mr. CLEAVER. [presiding] I recognize the gentlelady from California, Ms. Waters. 

Ms. WATERS. Thank you very much. 

I think part of what I was interested in has been answered. I basically take the position that the government, perhaps, should not 

be involved in deciding the compensation for executives of these 

companies, but I do believe that, when you have your banks and 

financial institutions coming to the government and accepting 

TARP money, accepting investments by the government, that they 

have to accept some of the rules of government to go along with 

it. And part of that may be say-on-pay. 

But I am really interested in the shareholders, and you just gave 

us some information that is surprising to me, that basically the 

majority, more than a majority of shareholders do not support sayon-pay. Is that what you just said? 

Mr. VERRET. Well, I just said, last year, there were 70 proposals 

at companies to adopt say-on-pay at those companies. Now, of those 

70, 10 of them were successful. And the average vote at those 70 

different elections on whether we should do say-on-pay, the average 

vote was a 60 percent vote against. 

Among the financial companies subset of this, and this is from 

a paper by Jeff Gordon at Columbia Law School, the average vote 

at financial companies was a 70 percent vote against say-on-pay. 

Ms. WATERS. Well, I need to ask all of you, and you may have 

stated this already, whether or not you believe that the government has a right to say-on-pay and other demands on companies 

that receive taxpayer money in the form of loans. 

Ms. MINOW. Yes. 

Mr. TURNER. Congresswoman Waters, absolutely. 

When you take money from a government, you understand it is 

a whole new rule of game. And if you don’t want to play by the 

government rules, you don’t need to take the government’s money. 

It is as simple as that. 

Back to the point on investors’ votes on say-on-pay, there are a 

couple of other key facts that you need to consider in those votes. 

In some of those companies, the compensation, the investors might 

have in fact decided that compensation was satisfactory, and in 

that case, they tend not to vote for say-on-pay proposals. 

I sit on two large institutional funds, one being the public pension fund for Colorado, the equivalent of your CalPERS and 

CalSTRS, as well as a mutual fund for AARP. If compensation is 

fine and we think within limits, one may not vote for say-on-pay, 

although typically we still do. 

The second thing is that the large mutual fund institutions, Fidelity, Barclays, etc., vote with management close to 90 percent of 

54 

the time. The reason they do is because they get assets from management, from the corporate pension funds, to manage, and they 

get tremendous fees for that. And as a result of that, they aren’t 

going to vote against management. They aren’t going to vote for 

say-on-pay because the management team will take those funds 

away from them and place them with another asset manager, and 

so those votes become very problematic. 

What we need is legislation that says, when the pension fund— 

or when the mutual funds vote on behalf of the investors in that 

fund, they have to make that vote based on the best interest of 

those investors, not their best interest as a mutual fund. 

A prime example is a few years ago when there were phe- nomenal, almost $200 million in payouts to an executive leaving at 

Pfizer, and there was a question about their board and all. The 

Pfizer management team, two senior top people, who are quite 

frankly close personal friends, flew to California, met with Barclays 

and reminded Barclays that they were getting $14 million in fees 

to manage Pfizer assets, and the next day, they voted straight 

down the line for Pfizer. And I think that is a classic example of 

what goes on and what needs to be corrected. 

Ms. WATERS. I appreciate that advice and that information. I am 

looking to play a role in some of this reform, and those are precisely the kinds of issues that I want to deal with, so you will hear 

more from me. 

Thank you very much. I yield back. 

Mr. CLEAVER. Thank you. 

I will yield time now to the gentleman from North Carolina. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

I have a question that one of my colleagues asked the previous 

panel that I thought was an interesting one. Mr. Neugebauer from 

Texas asked a question. He asked, if I presented you with $1,000, 

and in 2 weeks, you brought back $1 million on that investment, 

that in essence you made me—took $1,000 and turned it into $1 

million for me, would it be appropriate for me to pay you $10,000? 

Would that be fair compensation for the return you have given me? 

Mr. Bebchuk, if we can go quickly down the line and answer this 

question yes or no. 

Mr. BEBCHUK. I wouldn’t be able to answer it without knowing 

more about the circumstances. But none of the proposals that even 

anyone here supports, none of the proposals that the government 

has put forward, involves this kind of judgment. 

They all involve at most either changing the governance rules 

and letting make people make decisions or involve judgment about 

structure. If you ask me about structure, I will have clear answers. 

Mr. MCHENRY. Well, the structure is just as I said. If we could 

just do quickly; I only have 5 minutes. 

Ms. Minow? 

Ms. MINOW. I think you would be getting a very good deal for 

that amount of money. 

Mr. MCHENRY. So it is fair compensation? 

Ms. MINOW. Yes, or even a higher amount could be fair under 

your scenario. 

Mr. MURPHY. It might not be fair to the agent who should be getting a higher percentage of the deal. 

55 

Mr. MCHENRY. Interesting. 

Mr. TURNER. The question may be whether or not you should pay 

them more than $10,000 or not if they were able to get you a million. 

The problem is that isn’t the facts we are dealing with. The fact 

is, instead of paying a thousand, we paid hundreds of thousands 

or millions of dollars and instead of getting back the million dollars 

of profit, we ended up with billions of dollars in write-offs that in 

fact today are in excess of a $1.2 trillion and requiring government 

bailout of companies that failed. 

The question isn’t should they get a $10,000 bonus, the real 

question is should I get my thousand bucks back because they lost 

so much. 

Mr. VERRET. Well, Representative McHenry, I have a lot of confidence in my investment skills, and I would be happy to put you 

in touch with my agent, but I think $10,000 would be way too low. 

I would just offer that this hearing is about systemic risk and executive compensation. I would rest on my testimony that if that 

were really such a strong link, healthy TARP banks that are about 

to get out of TARP and bad TARP banks, we could look at them 

and we could see some differences in their executive comp. 

I have read through the disclosures of every single one of them 

over the last 2 days, haven’t done much else besides that, and 

there is not much difference between those two comp policies. 

Mr. MCHENRY. Would it be fair to perhaps up the base compensation and have fewer incentives? Is that best aligned with 

shareholder interest, Mr. Verret? 

Mr. VERRET. Well, in some cases, yes, and in some cases, no. I 

would defer to negotiations between the shareholders and the 

board on that issue. 

Mr. MCHENRY. So how can the government proscribe corporate 

governance effectively? 

Mr. VERRET. Well, I think that it is about a combination of corporate governance issued at the State level that is I think very effective in a lot of areas. Some corporate governance disclosures 

issued at the SEC, and that by the way has become the central 

mission of SEC. I think some of the things that the SEC has been 

trying to do, especially with respect to the current proxy access proposal as it is currently designed, exceeded its authority under the 

1933 and the 1934 Acts. 

And we have seen the SEC is about 0 for 3 in challenges before 

the D.C. Circuit. I think it is going to be 0 for 4 after this proxy 

access rule. So I think it is about disclosure, and I think it is about 

State corporate law and the protections afforded shareholders at 

that level. 

Mr. MCHENRY. Is the shareholder proxy vote on executive compensation the way to go? 

Mr. VERRET. I think say-on-pay can be particularly dangerous. 

And I also think comparisons to the U.K. are deceptive for a lot of 

reasons. 

The structure of shareholders in the U.K. is very different, dominated by insurance companies and private pensions much more 

where the United States is more retail investors with a lower votVerDate Nov 24 2008 16:38 Nov 05, 2009 Jkt 052398 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\52398.TXT TERRIE
56 

ing rate and also substantially more union pension ownership. So 

I would say it is not the right way to go. 

Mr. MCHENRY. Now, in the previous panel, Mr. Sperling testified 

that the corporate community is setting best practices in regard to 

executive compensation. Do you think that is the way to go? 

Mr. VERRET. I think best practices generally are great. I think 

we have seen some great best practices promulgated by Risk 

Metrics, great best practices promulgated by the Council of Institutional Investors, and some great best practices promulgated by the 

Chamber of Commerce and the Business Roundtable. 

When the government does it, I wouldn’t call it best practices 

any more. We have seen the government use its moral authority 

and the threat of regulation when best practices are effectively a 

demand. 

Mr. MCHENRY. How effective do you think the 2006 executive 

compensation laws have been? 

Mr. VERRET. The 2006 disclosures, I think it is too early to tell 

because we have only had about 2 years of history there. I think 

part of the issue is there is not enough working history to really 

work from. And I think part of what Chairman Shapiro’s committee is doing on refining those disclosures I would also, frankly, 

support. 

Mr. CLEAVER. The gentleman from Minnesota is recognized. 

Mr. ELLISON. Professor Verret, you just made an interesting 

point about there not being enough history to make a decision. And 

I think that might even apply to your analysis with regard to 

banks that paid back their TARP funds and banks that did not 

having similar compensation systems. TARP hasn’t been around 

that long, so how can you be so sure, based on the limited history 

that we have? And why is that metric one that we should rely on 

when we determine whether or not compensation systems have a 

causal effect on risk-taking? 

Mr. VERRET. Congressman, that is exactly the point; I am not 

sure. I am not sure that executive compensation led to systemic 

risk issues. The reason why I am not sure is because of the evidence I have suggested. 

Mr. ELLISON. When you are not sure, that means maybe it is, 

maybe it isn’t. The point you are making, I come away with thinking, well, so what? You know, there is not enough of a body of information to use that metric to decide whether it is or it isn’t. Can 

you tell me why I am wrong about that, Mr. Bebchuk? 

Mr. BEBCHUK. I think you are actually right. There is no widely 

shared consensus that executive compensation incentives did contribute to the crisis. We can rely on the CEO of Goldman Sachs 

who, in an editorial in the Financial Times just 2 months ago, stated very strongly his view that those compensation arrangements 

were flawed, and we need to reform them. 

Indeed, financial firms across-the-board now take the view that 

they were wrong. They might not like government intervention, but 

I think that at this point there is widely shared consensus that executive compensation arrangements need to be reformed, and the 

only room for disagreement is what role the government should 

have in bringing about the changes that everybody agrees are necessary. 

57 

Mr. ELLISON. Professor Bebchuk, or actually I want to open this 

up to anyone. One of the things that I keep hearing is, we have 

to let American corporations get all of the money they want under 

whatever compensation system that they want because if we don’t, 

then these really smart, talented people are going to go elsewhere. 

What I am thinking, and I know that I am not doing exact justice 

to this exact point of view, but you have heard this line of argument. Ms. Minow, can you comment on this issue? If we reform the 

entire American system— 

Ms. MINOW. Yes, I agree with you, Congressman. 

I think that is a bogus argument. The first point is, where would 

they go? They would go into private equity, and the shareholders 

can invest in the private equity. So that is just fine. 

Second, these guys didn’t do that good of a job, so let them go. 

Let them go abroad and let them wreck their economy. 

Mr. ELLISON. Do European firms compensate the way we do? 

And in line with that, I mean, is there another way to conceive of 

executive compensation, or is the way we have been doing it the 

only way to see it? And from what I understand, and I could well 

be wrong, European and Asian firms don’t pay their executives this 

way. 

Ms. MINOW. Unfortunately, one area where the United States is 

way ahead of everybody else is in the area of disclosure, and so we 

don’t have good, comparable data. So there are a lot of off-of-thedisclosure-books kinds of payments that we don’t know about. 

Mr. MURPHY. We have increased disclosure across the world. I 

have just completed a study of 27 countries, and one of the things 

we find is that the rest of the world slowly is catching up to the 

United States. 

The United States has higher compensation after you control for 

size and industry. But stock options, for example, which used to be 

nonexistent in all but a couple of countries 20 years ago, are now 

prevalent in almost all countries. 

Mr. ELLISON. I would like you to send me that study. Would you? 

Mr. MURPHY. Absolutely. 

Mr. BEBCHUK. The argument that people will go and work elsewhere is also unwarranted because everybody here is focused on 

changing the structure. So there is really no reason whatsoever to 

provide compensation that produces perverse incentives and destroys value. At most, this argument would be, give them the same 

amount but use it to give the incentives to work for the company, 

not against it. 

Mr. ELLISON. Are you familiar with a book called, ‘‘In Search of 

Excess’’ written in 1991? 

Ms. MINOW. Graef Crystal wrote that, yes. 

Mr. ELLISON. So this conversation about excessive executive pay, 

whether or not you will buy it or not, it is not a new argument, 

is it? 

Ms. MINOW. No. The book that I would recommend to you even 

more than that because it is more up to date is Rakesh Khurana’s 

book, ‘‘In Search of a Corporate Savior.’’ And the thing I like about 

that book which influenced my thinking is that he says payments 

of executive compensation need to be looked at in terms of return 

on investment, like any other asset allocation. 

58 

Mr. ELLISON. I think I am out of time. I thank you very much. 

Mr. CLEAVER. The gentlewoman from Minnesota is recognized. 

Mrs. BACHMANN. Thank you, Mr. Chairman. 

Mr. Bebchuk, publicly traded companies also pay high salaries to 

entertainers, to athletes, and to news anchors. And what I am wondering is, should these decisions also be subject to shareholder approval? 

Mr. BEBCHUK. No, I think not. What we are concerned about, 

about top executives, is not so much the amount but the concern 

that we don’t have arm’s-length contracting, that we don’t have the 

market at work. When you have the market at work, we can let 

privately reached decisions stay. But what we are trying to do with 

respect to top executives is to make sure that we have a well-functioning system rather than the one that we have had thus far. 

Mrs. BACHMANN. Thank you. 

Next would be Ms. Minow. You mentioned in your testimony 

that, although disclosure is important that people have to be able 

to act based on the information that is disclosed, isn’t the right to 

sell stock the ultimate way that shareholders can act? What is your 

opinion on that? 

Ms. MINOW. Not really. The one thing that you know about stock 

is you want to buy low and sell high. If the stock has been depressed by bad decisions on the part of management, it can be costeffective for you, in fact, to send a message back to that management rather than to sell out. 

Furthermore, many of the investors, including the large institutional investors, are so large and diverse that they are either indexed de facto or indexed de jure, they have nowhere else to go. 

And these pay plans are so pervasive, they have nowhere else to 

go, at least within the United States. So they don’t have the opportunity for what is called the Wall Street walk. 

Mrs. BACHMANN. Given the shareholders’ ultimate ability just to 

be able to sell their shares, shouldn’t we be concentrating our efforts on compensation disclosure in your opinion? 

Ms. MINOW. Compensation disclosure is absolutely essential, and 

I hope we can improve it. As Professor Verret said, we made some 

improvements in 2006, but it doesn’t really cover a lot of the kinds 

of issues that have been revealed by the financial meltdown. 

Mrs. BACHMANN. And you had talked before about preventing 

bad compensation practices, that really little can be done before the 

structure of the board is fixed. I think that is an excellent point 

that you are making. And could you talk about what your proposal 

would be? 

Ms. MINOW. Certainly. Right now, I know it is hard to understand if you are an elected official, but right now boards are elected. No one runs against them. Management counts the votes, and 

they can serve even if they only get one vote. I think it is very important that directors not be allowed to serve unless they get majority support from the shareholders. I think that way shareholders 

would be able to remove bad directors. 

Mr. VERRET. I would add that contested elections that would be 

part of the Commission’s current proxy action proposal would also 

be, I believe, plurality votes. So the same standard would apply. It 

wouldn’t be majority voting for contested elections. 

59 

Mrs. BACHMANN. I would open the questioning up to any panel 

member. On my previous question regarding athletes and news anchors and entertainers, and also on transparency and on disclosure, 

if anyone else would like to comment. 

Ms. MINOW. Lucien is 100 percent right. Those transactions are 

very closely negotiated at arm’s length. It is the coziness of the 

transactions between the top executives and the board that leads 

to this problem. 

Mrs. BACHMANN. Why is it that the board can’t be changed? 

Ms. MINOW. Because the CEO picks the board. 

Mrs. BACHMANN. And so you have the circle, they are chasing 

each other? 

Ms. MINOW. Yes. 

Mr. BEBCHUK. I would add that disclosure is helpful only if investors can then make decisions that would have an impact on directors using the information that they are given. And right now, 

their hands are tied in a number of ways. In addition to the difficulty of replacing the board, there are staggered votes, which are 

a unique American institution, which in a large a fraction of publicly traded companies prevent the shareholders from replacing the 

full board in any given election. And there is also the inability of 

the shareholders to amend the corporate charter so the shareholders cannot change the rules of the game. If they could, some 

of the work that you guys are called on to do could be left to the 

market. But right now the market cannot put in place corporate 

governance reforms that are viewed as important. 

Mrs. BACHMANN. Professor Verret? 

Mr. VERRET. I would counter that about half of the S&P 1500 is 

declassified. It is difficult, but shareholders have made some 

progress in declassifying boards. 

I would also just highlight a bit of a market failure, I think, in 

proxy advisory services. We saw the problems with market concentration in the credit rating agencies. It is much, much worse 

with proxy advisory services. Risk metrics rules the roost, and 

there is no required disclosure in these independence of competition committee rules. There is no required disclosure for proxy advisory firms, and I think there should be. 

We are not likely to see it, of course, because the former chief 

administrative officer of Risk Metrics is now a special adviser to 

the chairman, so I think we are unlikely to see it at this point. But 

I think it is worth considering. 

Mrs. BACHMANN. I yield back. 

Mr. CLEAVER. I recognize the gentlewoman from California. 

Ms. SPEIER. Thank you, Mr. Chairman. 

I want to thank the panel. It has been a very lively discussion, 

and I think you underscore for all of us what a sticky wicket this 

issue area is. 

I would first like to point out that Paul Volcker said it very succinctly very recently when he said that the financial demise that 

we have just witnessed is the result of executive compensation that 

has been linked to riskier and riskier activity. And I think a number of you have pointed that out in your testimony. 

60 

I think that we have no role as a Congress to effect executive 

compensation if we don’t have an investment, so to speak. So when 

it comes to TARP recipients, you bet I think we have a role to play. 

Now what we do have a role to play in other circumstances is 

empowering the shareholders. That is what our focus should be. 

And I think right now the game is fixed. Based on what you have 

just said, if you get one vote, you are reelected. Wouldn’t we all like 

to have that kind of experience being elected to Congress? 

It sounds fundamentally undemocratic that you don’t have someone independently counting the ballots and that a majority is not 

required. So I think, and I keep coming back to Mr. Sullivan, who 

was then the CEO of AIG who had performance requirements for 

bonuses. He went to his board of directors and said, we want you 

to waive the requirement for performance in this situation even 

though we have just lost $6 billion and give the bonuses anyway. 

And guess what the board did? 

Ms. MINOW. They said yes. 

Ms. SPEIER. They said yes, and those bonuses were offered and 

Mr. Cassano received a million dollars a month after he was fired. 

It is extraordinary, and it is wrong, and the American public is on 

to it. 

My question to all of you is, since you can always manipulate the 

system, as Mr. Sullivan did where he actually had performance requirements in place for purposes of giving bonuses, why not just require of all of the members of the board of directors a fiduciary 

duty to the shareholders? 

Mr. BEBCHUK. They do have a fiduciary duty, but the problem is 

that enforcing fiduciary duties is difficult because there is the business judgment rule, and courts are not going to second guess the 

judgment of the directors. That is why the main remedy is to make 

directors accountable to the judgment of the shareholders. 

And you mentioned AIG. We have never had in the history of the 

U.S. public markets a control contest for a company the size of AIG 

because the impediments to a proxy fight in a company that large 

are just practically insurmountable. And many of the arrangements 

that people are discussing are arrangements that tried to expose 

incompetent directors more to the discipline of an electoral challenge. 

Mr. TURNER. I might note that there are almost never any actions brought against boards of directors. The SEC, to the best of 

my knowledge, never brought an action against any of the directors 

of Enron; never brought an action against any of the directors of 

WorldCom; and only brought one action against the directors of 

Tyco, and that was because the guy had taken a bribe. 

So for the most part, given the way that State laws operate, 

which aren’t very good and quite frankly, the staff of this committee has been urged to take up a proposal to allow shareholders 

to ask for reincorporation in a more shareholder-friendly State, 

which is an excellent proposal, by the way. 

But for the most part, until you can hold directors accountable, 

and in this way it is the proposal just to be able to throw them out, 

you are never going to get any action because the law enforcement 

agencies literally will not touch them, have not touched them, even 

in the most egregious cases today. 

61 

Ms. MINOW. Many of the directors of the failed companies are 

continuing to serve on boards. It is flabbergasting to me, but they 

are still there. 

Mr. VERRET. I would specifically counter the observations about 

State law. Delaware is the corporate State law that I have spent 

the most time studying. Delaware is very responsive to shareholders, particularly responsive. They instituted majority voting. 

They made majority voting easier. As a result, now we have majority voting in, I think, 60 to 70 percent of companies; this is the 

withhold vote, kick-the-bums-out sort of rule. People wanted proxy 

access. Delaware instituted proxy access, although the SEC wasn’t 

able to do it. So that was very responsive to shareholders, I would 

say. 

Ms. MINOW. When is the last time a director has been held liable 

by a Delaware court for any personal payment out of his own pocket absent personal corruption? 

Mr. TURNER. After approving the Ovitz, and the court held Ovitz 

could get paid $160 million in the most egregious situation and 

said, it is a-okay. The courts in Delaware said it; it is not an investor-friendly State. 

Mr. VERRET. The Ovitz litigation is one specific case. That was 

6 or 7 years ago. 

Ms. SPEIER. Thank you, my time has expired. 

Mr. CLEAVER. The ranking member from Alabama is recognized. 

Mr. BACHUS. Thank you. 

How many of you were at the first panel and heard the testimony? 

Mr. Sperling, I have a great respect for him. He talked about 

some of the executive compensation decisions that actually led companies, they actually increased risk, and I think when we hear that 

we think of AIG, and we think of maybe some of the subprime 

lenders where people, mortgage originators were paid by the volume of work without regard to whether the borrower could repay. 

Give me a percentage of companies that you think engaged in this 

sort of risky dangerous behavior? 

I will start with Professor Bebchuk. 

Mr. BEBCHUK. I think that the widely shared view that I alluded 

to before, that incentive structures were flawed, applies to companies in the financial sector across-the-board. Most of the companies 

in the financial sector, this is what made this financial crisis so difficult. Most of them made decisions that at least in retrospect 

seemed to have involved excessive risk-taking, and they all generally had those incentive structures that had the short-term flow 

that they now generally recognize. 

Mr. BACHUS. Of just corporate America, how many corporations 

do you think engaged in dangerous, risky behavior that endangered 

the economy? 

Mr. BEBCHUK. I think the problem of short-termism, the practice 

that is now widely recognized as being problematic, namely that 

executives can cash out shares and options immediately upon vesting and that bonuses are often short term, this practice is general 

across corporate America. 

Now I would say the financial sector, the opportunities for risktaking are not as large as they are in the financial sector, and, 

62 

therefore, the fact that we have had flawed incentives has manifested itself. But it is now generally accepted that also firms outside the financial sector should fix this very problem of tying compensation to the long term and not to short term. 

Mr. MURPHY. I would like to be careful not to define excessive 

risk-taking as just those risks that generate losses as opposed to 

gains. Actually, through most of our history, our problem in corporations has been to encourage individuals, risk-averse individuals to actually take risks, and the individuals inside corporations 

tend to be more risk-averse than the shareholders. The entrepreneurial spirit is all about risk-taking. 

Mr. BACHUS. I agree. Mr. Verret? 

Mr. VERRET. Just to answer your question specifically, I think it 

is a small number of corporations in terms of number; very large 

in terms of the assets that they manage. I think this goes to a related issue of, do we let them get too big? And I would applaud the 

Federal Reserve’s current initiative to think about changing capital 

requirements based on size. I think that is a useful thing to talk 

about. 

And I would also offer, just highlighting from my testimony, I 

would offer that quarterly earnings guidance is a dangerous thing 

that affects a lot of companies, and it is something that companies 

want to get out of. 

Mr. BACHUS. Let me ask you this: Do you believe that the CEO 

or the board of directors or people inside the corporation, isn’t one 

of the jobs of the CEO to look at performance and pay and set executive compensation as opposed to some independent board? 

Ms. MINOW. Yes. It is the job of the board to set the CEO’s compensation and to value his performance, including his performance 

in setting compensation. 

Mr. BACHUS. So both the CEO and the board of directors, you all 

agree that they primarily should be responsible for setting compensation? 

Ms. MINOW. Yes. Absolutely. 

Mr. BACHUS. Professor Verret and Professor Bebchuk, as I understand it, the compensation proposal envisions linking executive 

compensation to performance of bank debt and preferred shares. 

What is your view of that proposal? 

Mr. VERRET. I would offer just with respect to the idea of using 

debt—linking debt to pay, I think three things are worth thinking 

about: First, an executive’s ability to be rewarded on the upside 

would be limited the more you include debt in the mix. I also 

thinks he makes an assumption at least in the paper that I think 

is absolutely correct, the fact that the moral hazard of government 

bailouts means that debt tends to not to be affected too much when 

a bank’s health is affected. I think that is an absolutely safe assumption. It is one of the reasons that debt holders don’t police executives as much as they should. It also means if you were to link 

debt to executive’s pay, it means that if the debt doesn’t go down, 

the pay doesn’t go down. So you limit the upside, and you also limit 

the downside. The amplitude you get is very flat rather than upward and downward incentives as you add pay into the mix. 

Mr. CLEAVER. The gentleman from Texas is recognized. 

63 

Mr. GREEN. Thank you, Mr. Chairman, and thank you, members 

of the panel. If I interrupt, please forgive me. I don’t mean to be 

rude, crude and unrefined, but I am trying to make a point. 

Let me start by asking about the executives in the U.K. Do they 

in the main make more than executives in the United States? 

Mr. MURPHY. No. 

Mr. GREEN. Executives in Germany, do they in the main make 

more than executives in the United States? 

Mr. MURPHY. No. 

Mr. GREEN. Executives in France, do they in the main make 

more than executives in the United States? 

Mr. MURPHY. No. 

Mr. GREEN. The question becomes this then, to those who contend that if we do anything to encroach upon the current system, 

people will flee to other places and make inordinate amounts of 

money in other places, leaving us with a brain drain; the question 

becomes: Where do they go? 

Mr. MURPHY. They go to private equity and hedge funds. 

Mr. GREEN. Private equity and hedge funds in the United States? 

Mr. MURPHY. Within the United States. And no one is going to 

Europe. 

Mr. GREEN. The percentage of private equity and hedge funds 

cannot accommodate the number of executives that we are talking 

about, so some may go. But the truth be told, the argument is that 

we are going to lose them to other countries. That is the argument 

that is being made, and there is no other country that they are 

going to go to and fare as well as they are faring in the United 

States of America. 

Mr. VERRET. Except that could change if we link pay. 

Mr. GREEN. Excuse me, it could change if the U.K. would change 

its laws. It could. It could change if Germany and France changed 

their laws. That doesn’t seem to be the case because they seem to 

be leaning even more towards executive regulation. 

By the way, I am not a proponent of trying to stifle the free market. I want to see people make as much as they can. But I don’t 

want to see people at AIG drive a company into the ground and 

then walk away with huge bonuses. There is something wrong with 

this, and the American people know there is something wrong with 

it. And they are going to chastise us if we don’t do something about 

it. I appreciate the notion that there are other places for people to 

go, but they won’t find the coffer in these other places that they 

find in the United States of America. 

And those who want the auto workers at Ford, Chrysler, and GM 

to get salaries comparable to Nissan and Toyota, they don’t look at 

what the salaries of those CEOs at Nissan and Toyota are making. 

Their salaries are not in line with the salaries of the American 

auto industry executives in this country. They are not. Nobody that 

I have heard, and there may be a voice that I haven’t heard, I confess that I don’t hear everything that is said, but nobody that I 

have heard has indicated in any way that we need to make sure 

that the salaries of the auto executives in this country are in line 

with the salaries of the auto executives in other countries. It is just 

not being made. 

64 

Now, at some point, we have to ’fess up and say we have some 

business to take care of, and take care of the business that we 

must take care of. If we don’t do this, this is our hour, our moment, 

this is our time to do what is right; not to try to manage this, not 

to try to make sure that we do it, do this thing right, but do the 

right thing. That is what we have to try to do here. 

So I am not for taking control of a company. I don’t want to see 

stockholders micromanage a company. I am not interested in that. 

But I contend that the chairman is right when he talks about how 

we have promoted excessive risk without consequences for the failure, not serious personal consequences for the failure. So we have 

people who are trying to do all that they can to make as much as 

they can, understanding if they don’t, I will just take my bonus and 

my golden parachute and fly out. That kind of behavior is what we 

are talking about, as I see it, and I think there is room for us to 

do something, and I would like to see it done in a bipartisan way, 

by the way. I am amenable to working with folks on the other side 

to come to a sensible center on this so we can have bipartisan legislation. 

But I still contend that those workers who took that cut at GM 

and who were taking cuts, they didn’t get bonuses cut. They got 

bread and butter cut, and there is a difference. And there is not 

a big to-do about what is happening to them. 

Mr. Chairman, I yield back the balance of my time after having 

the opportunity to speak for those who are not here to speak for 

themselves. 

Mr. CLEAVER. Let the church say, ‘‘Amen.’’ 

The gentleman from Florida is recognized. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

We are trying to make policy on the basis of recent memory. For 

the past few months, we have seen banks that have brought themselves to the brink of ruin, brought the whole U.S. economy to the 

brink of ruin. And what people see, which is so frustrating to them, 

is that they see that nobody is being held accountable for that. Nobody is being punished for that. Maybe the gravy train has slowed 

down a little bit for them, but it is still rolling. And I think people 

find that frustrating, and rightfully so. 

I am worried that proposals like this don’t go far enough. They 

don’t say, you don’t get paid extra if you destroy your company. 

You don’t get paid extra if you hand the taxpayers a hundred billion dollar bill. What I want to hear is I want to hear your best 

ideas about how we should hold accountable the people who have 

already screwed up, the people who have already caused the destruction of their own banks and caused the taxpayers to have to 

give out billions upon billions of dollars, and I want to know what 

we should do in the future about people like that. 

Let’s start with Ms. Minow. 

Ms. MINOW. Well, there is the limitation on ex post facto laws. 

There is not much you can do about what has already happened. 

But I would certainly strongly urge Congress to make sure that 

anyone involved could never serve on the board of a public company or as an officer of a public company ever again. It is unthinkable to me that these people continue to be involved. 

65 

Mr. GRAYSON. Let us be specific, when you say ‘‘anyone involved,’’ who would you include in that? 

Ms. MINOW. I would include the executives and the boards of directors of all of the main TARP companies, the ones that are still 

participating in the program. 

Mr. GRAYSON. So you would apply the same sort of punishment 

that the SEC actually frequently applies to people who are engaged 

in illegal trading? 

Ms. MINOW. Yes, I would. 

Mr. GRAYSON. Mr. Turner, your best ideas? 

Mr. TURNER. I totally agree with you about the frustration and 

that there needs to be accountability. I think the SEC in their announcement just in the last week about Countrywide and going 

after them is exactly what we are looking for. I think there have 

also been cases filed with respect to fraudulent reporting by companies such as Citicorp, and I think DOJ and SEC need to work those 

through the courts in the most diligent way. And I think some of 

the same question applies to Fannie and Freddie as well with some 

of their practices. Just as Nell has said with those who, after due 

process, people are found not to do the job; due process is important in this country, and we don’t want to run into cowboy justice, 

but where due process is, these people ought to be barred and the 

SEC has the authority to bar these people from ever being an officer and director again, and they haven’t had a good track record 

in doing it in the past, and they need to do it. And if they don’t 

do it, then you guys ought to haul the SEC up here and ask them 

why. 

Mr. GRAYSON. Mr. Turner, you are talking about cases of fraud. 

I am talking about something a little different. I am talking about 

cases of gross, gross mismanagement that literally led to the destruction of a multibillion dollar institution. How should we treat 

people like that, not people who file false statements with the government and the SEC, but people who destroy their companies and 

right now maintain control of those companies only at the benefit— 

only through the largess of the taxpayers, what should we do with 

those people? 

Mr. TURNER. When you passed the Sarbanes-Oxley Act, you gave 

the SEC to find that when they look at officers and directors and 

find that they are substantially unfit to fulfill those roles, they can 

bar them forever from serving in those roles at a public company. 

I think in some of the instances of these companies, we are going 

to find that some of these directors are in fact substantially unfit 

to fulfill that role, haven’t demonstrated the fitness ability, and the 

SEC should forever bar them from being an officer or director of 

another public company. 

Mr. GRAYSON. Mr. Bebchuk, what do you think we should do in 

a situation where somebody who heads a bank, or a group of people 

who head a bank, have run that bank into ruin and handed the 

taxpayers a hundred billion dollar bill? What should we do with 

those people? 

Mr. BEBCHUK. I very much understand the frustration, but I am 

concerned about retroactively changing the rules of the game. So 

to the extent, and this is hypothetical, if you have someone who 

acted completely according to the law, I would try to— 

66 

Mr. GRAYSON. What should the law be? That is what we do 

around here, determine that. 

Mr. BEBCHUK. But the law we had on the books up to this point 

was a law that did not make it criminal, as well as limited private 

actions. 

Mr. GRAYSON. Right. Mr. Bebchuk, it is legal to destroy your 

company and hand the taxpayer a hundred billion dollar bill. We 

understand that. We want to change that. What should we do? 

Mr. BEBCHUK. About people going forward? 

Mr. GRAYSON. If you wish. 

Mr. BEBCHUK. Going forward, you can reconsider the legal rules 

that right now completely insulate someone from legal liability 

when they engage in gross negligence. So we could reconsider those 

legal rules and open them to legal liabilities and circumstances. 

Mr. GRAYSON. My time is up. Thank you, Mr. Chairman. 

If any other members of the panel want to comment on this, 

please feel free to write to me and let me know. 

Mr. CLEAVER. The Chair recognizes the gentleman from California. 

Mr. SHERMAN. Or better yet, you could furnish your answer for 

the record, and we would all know. 

Mr. GRAYSON. Thank you. That is a good suggestion. 

Mr. SHERMAN. I would point out that criminal law can’t be ex 

post facto, but as Mr. Turner pointed out, we can ban some of these 

people from ever serving on the board of a publicly traded corporation again. And we might also look at the civil law to see whether 

those whose actions have cost us perhaps $700 billion, perhaps 

less, would be liable to the Federal Government. Ex post facto 

criminal laws are much more constrained by the Constitution. 

I would think that Wall Street itself would keep some of these 

people off the boards, except I can see some of them saying these 

folks didn’t show remarkably bad financial judgment; they showed 

tremendous political skill. They separated the taxpayers from $700 

billion worth of assets. 

Mr. Verret, you have been talking about how we need to keep 

talent motivated, but I think it has been pretty well illustrated by 

the gentlemen from Texas, nobody is moving to London let alone 

Tokyo to make more money, or very few are. 

Is there any economic theory that would say, if 10 percent of the 

executives who worked for publicly traded banks then found themselves at the hedge funds, that would mean a diminution in the 

quality of financial management in this country? Would a slight 

change of talent moving from the publicly traded sector to the not 

publicly traded sector, has anyone proven that would hurt you? 

Mr. VERRET. I am not an economist specifically. 

Mr. SHERMAN. Are you aware of any such study? 

Mr. VERRET. I am not aware of any such study. 

Mr. SHERMAN. Okay, thank you. 

Professor Bebchuk, I don’t believe that we are going to control or 

should control compensation for a company, except if it is publicly 

traded, in which case we want to make sure that shareholders are 

empowered, systemically it puts the country at risk or is governmentally subsidized, assured, insured, etc. 

67 

This leaves the hedge funds, where it is my understanding that 

for the most part you do have incentive to take enormous risks. 

There is a lot of talk about, well, if the investment does well, the 

management should do well. If the investment does poorly, the 

management should do poorly. I know of no hedge fund that is 

structured that if they lose money, the management writes a check 

out of their own pocket. 

Is the typical structure of a hedge fund one that encourages excess risk? By typical structure, I mean one where the management 

puts in none of its own money, shares only in the profits, has no 

real compensation except for the profits, and in some cases doesn’t 

share until a 5 or 10 percent rate of return is achieved. And if so, 

are some of these hedge funds a systemic risk to the country? 

Mr. BEBCHUK. I agree with you that the government should not 

constrain the substantive choices that are made in the fee arrangement between hedge fund managers and their investors. 

But I also agree with you that, as part of this general reconsideration that is now taking place, investors in hedge funds should 

take a serious look at those arrangements because I do share your 

sentiment that the same sort of focus problems that we have now 

witnessed with publicly traded companies exist in the hedge fund 

areas. So what we have, there are many hedge funds where usually 

the arrangement is they don’t give back money, but there are those 

high water marks. Therefore, there is a situation where they might 

not be able to get extra funds which creates a lot of distortion because either they fold the fund or they work without high incentives, so I think it would be a good idea for investors to reconsider. 

Mr. SHERMAN. Are investors given enough information about 

management compensation at hedge funds? 

Mr. BEBCHUK. Yes. Those are arrangements that are negotiated 

with a small number of investors, and they are fully disclosed. 

Mr. SHERMAN. My next question is, is a fight between management and insurgent shareholders a fair fight, or is it more like an 

election in Venezuela? Do the minority shareholders have any access to corporate funds, and is management allowed to use corporate funds as they will to call and propagandize? 

Ms. MINOW. I think I am the only one on the panel who has actually tried to do this. I can tell you that management will spend 

every last dime of your money against you. I am not saying that 

it needs to be a level playing field, but right now it is pretty perpendicular. 

Mr. SHERMAN. So much for shareholder democracy. I yield back. 

Mr. CLEAVER. I have just one question. Morgan Stanley has instituted this clawback provision. Are you familiar with it? It is after 

the fact, where if a CEO has jeopardized the company, they will 

then repossess any bonuses or special compensation. Is that something that you think would be applicable for legislation that this 

committee will consider? 

Mr. MURPHY. At Morgan Stanley, it is not just the CEO; it is any 

executive that they determine has caused harm. I would have gone 

further and said, even if you didn’t cause harm, if you got money 

that you shouldn’t have gotten, you should give it back. But that 

is the role of good corporate governance and compensation policy, 

not the role of government regulation. 

68 

Ms. MINOW. On the other hand, the executives have raised their 

base pay to make up for some of the additional risk they are taking 

on, so I don’t approve of that. 

Mr. CLEAVER. Of course, it would be government business if we 

put it into legislation. 

Mr. MURPHY. I understand that. 

Mr. TURNER. I do support and noted in my testimony the right 

of investors. When someone has operated in a reckless or fraudulent way, I do support giving investors the right to go for that 

clawback. In that manner, either the board can ask for the 

clawback and get it back or the shareholders can, because someone 

ought to go get that money back. 

Mr. VERRET. I think this goes to the disclosure issue and the 

SEC’s work in 2006 and Chairman Shapiro’s current work in this 

area. The right question is, did the board go for a clawback? If not, 

it should have to explain why to the shareholders. 

Mr. CLEAVER. Thank you. I appreciate all of the time you have 

spent with us. And the ranking member has a question. 

Mr. BACHUS. Professor Verret, Treasury yesterday released a 

statement on executive compensation that supported the passage of 

say-on-pay. Will say-on-pay be effective, in your opinion? 

Mr. VERRET. Well, I think one of the problems that I hope I get 

across is what we have seen in Britain is that concentration of the 

proxy advisory firms has caused sort of a one-size-fits-all solution 

to take hold in pay. I think it is better to have a flexible approach, 

that compensation committees should have the flexibility to design 

compensation proposals appropriate for their own businesses. 

I also worry about the possibility that say-on-pay could minimize 

a board’s ability to change compensation as required by major 

changes in markets and events in midstream between the annual 

advisory vote on say-on-pay. 

I also worry about the effects of say-on-pay on severance packages and the ability to negotiate a so-called golden handshake to 

facilitate an efficient merger acquisition. Even if you do a vote, 

sometimes negotiations happen overnight with respect to negotiating mergers and acquisitions, and I think those sort of agreements are very important, and sometimes they need to be approved 

very quickly, not with enough time to do a shareholder advisory 

vote. 

Mr. CLEAVER. The Chair notes that some members may have additional questions for this panel which they may wish to submit in 

writing. Without objection, the hearing record will remain open for 

30 days for members to submit written questions to these witnesses and to place their responses in the record. 

This is the end of this hearing. We thank you for participating. 

[Whereupon, at 2:25 p.m., the hearing was adjourned.] 

(69) 

A P P E N D I X 

June 11, 2009 

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