TESTIMONY OF 

KENNETH R. FEINBERG 

Special Master for TARP Executive Compensation 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES 

FEBRUARY 25, 2010 

Mr. Chairman and Members of the Committee: 

I thank you for the opportunity to testify today. The subject of executive 

compensation continues to concern the American people and the international business 

community, so I welcome your invitation and look forward to participating in this 

hearing. 

As you know, in June of 2009 I was asked to serve as the Special Master for 

TARP Executive Compensation by Secretary Geithner. In that capacity, under the 

relevant statutory1 and regulatory2 authority, I have a number of responsibilities related to 

the oversight and review of financial industry compensation. 

My primary responsibilities include making determinations regarding the 

compensation of certain employees of TARP recipients that have received exceptional 

financial assistance. There were originally seven recipients of exceptional financial 

assistance. Currently, five companies have outstanding “exceptional assistance” from the 

American taxpayer: AIG, Chrysler, Chrysler Financial, GM and GMAC. (Two 

companies that were previously under my jurisdiction—Bank of America and 

Citigroup—have repaid their “exceptional” taxpayer assistance, although Citigroup will 

continue to be subject to the rules applicable to all TARP recipients until it completes its 

repayment of all TARP obligations.) Under pertinent Treasury regulations, I am required 

to determine individual compensation for the “top 25” executives at these five 

companies, and to make determinations on compensation structures—but not individual 

payments—for executive officers and 75 additional employees who are not in the “top 

25” group. This mandatory jurisdiction applies only to the “exceptional assistance” 

recipients and does not extend to employees of any other financial institutions or 

 

1 See Section 111 of the Emergency Economic Stabilization Act of 2008, as amended by the American 

Recovery and Reinvestment Act of 2009 (EESA). 

2 See TARP Standards for Compensation and Corporate Governance, 31 C.F.R. § 30.1 et seq. 
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corporations. Although I do have discretion to make recommendations and render 

nonbinding determinations concerning other TARP recipients, this jurisdiction is purely 

advisory and not mandatory, and I have no legal authority to make binding 

determinations pertaining to executive compensation for any companies other than the 

exceptional assistance recipients. 

The Committee has asked me to focus on three separate inquiries. 

First, you noted the necessity that I balance the competing obligations of reining 

in excessive compensation to protect the public good and allowing compensation 

sufficient to maximize the public’s investment in the financial industry. The tension 

between reining in excessive compensation and allowing necessary compensation is, of 

course, a very real difficulty that I have faced and continue to face in making individual 

compensation determinations. Under Treasury regulations, my primary directive in 

overseeing compensation structures and payments within my jurisdiction is to determine 

whether the structures or payments in question were, are or may be “inconsistent with the 

purposes of section 111 of EESA or TARP, or are otherwise contrary to the public 

interest.” In my determinations I have referred to this directive as the Public Interest 

Standard; to meet it, a compensation package must balance appropriately the competing 

obligations you described. 

Because achieving this balance is a fundamental component of the Public Interest 

Standard, it has played a determinative role in each of the rulings issued by the Office of 

the Special Master. In particular, the October 22, 2009, Determination Memoranda, 

which addressed compensation structures and payments for the “top 25” executives of the 

exceptional assistance recipients, and the December 11, 2009, Determination 

Memoranda, which addressed compensation structures for executive officers not in the 

“top 25” and up to 75 additional most highly compensated employees, were designed to 

balance the need to protect the public good while allowing necessary compensation in 

appropriate cases. Likewise, whether compensation structures and payments meet the 

Public Interest Standard will be the basis of my forthcoming 2010 determinations for the 

five remaining exceptional assistance recipients. 

Second, you asked for a description of the variables and considerations at issue 

when determining whether compensation levels or structures are appropriate. Treasury 
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regulations require that, when I determine whether a payment or compensation structure 

meets the Public Interest Standard, I consider the following six principles:3

(1) Risk. The compensation structure should avoid incentives that encourage 

employees to take unnecessary or excessive risks that could threaten the value of 

the company, including incentives that reward employees for short-term or 

temporary increases in value or performance; or similar measures that may 

undercut the long-term value of the company. Compensation packages should be 

aligned with sound risk management. 

(2) Taxpayer return. The compensation structure and amount payable should reflect 

the need for the company to remain a competitive enterprise, to retain and recruit 

talented employees who will contribute to the recipient’s future success, so that 

the company will ultimately be able to repay its TARP obligations. 

(3) Appropriate allocation. The compensation structure should appropriately allocate 

the components of compensation such as salary and short-term and long-term 

performance incentives, as well as the extent to which compensation is provided 

in cash, equity, or other types of compensation such as executive pensions, or 

other benefits, or perquisites, based on the specific role of the employee and other 

relevant circumstances, including the nature and amount of current compensation, 

deferred compensation, or other compensation and benefits previously paid or 

awarded. 

(4) Performance-based compensation. An appropriate portion of the compensation 

should be performance-based over a relevant performance period. Performancebased compensation should be determined through tailored metrics that 

encompass individual performance and/or the performance of the company or a 

relevant business unit taking into consideration specific business objectives. 

Performance metrics may relate to employee compliance with relevant corporate 

policies. In addition, the likelihood of meeting the performance metrics should 

not be so great that the arrangement fails to provide an adequate incentive for the 

employee to perform, and performance metrics should be measurable, 

enforceable, and actually enforced if not met. 

(5) Comparable structures and payments. The compensation structure, and amounts 

payable where applicable, should be consistent with, and not excessive taking into 

account, compensation structures and amounts for persons in similar positions or 

roles at similar entities that are similarly situated, including, as applicable, entities 

competing in the same markets and similarly situated entities that are financially 

distressed or that are contemplating or undergoing reorganization. 

(6) Employee contribution to TARP recipient value. The compensation structure and 

amount payable should reflect the current or prospective contributions of an 

employee to the value of the company, taking into account multiple factors such 

 

3 See 31 C.F.R. § 30.16(b)(i-vi). 
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as revenue production, specific expertise, compliance with company policy and 

regulation (including risk management), and corporate leadership, as well as the 

role the employee may have had with respect to any change in the financial health 

or competitive position of the recipient. 

Under the regulations, I have discretion to determine the appropriate weight or relevance 

of a particular principle depending on the facts and circumstances surrounding the 

compensation structure or payment for a particular executive, which I must often exercise 

when two or more principles are in conflict in a particular situation. 

To actually apply these principles and make my compensation determinations, I 

have relied on numerous sources. Empirical compensation data has been provided to me 

by the exceptional assistance recipients, and additional data has been secured by my 

office through independent means.4

 My office includes a special detail of Treasury 

personnel, including executive compensation specialists with significant experience in 

reviewing, analyzing, designing and administering executive compensation plans, and 

attorneys with experience in matters related to executive compensation. I have also 

benefitted from the input and sound advice of outside academic experts—including 

world-renowned executive compensation experts Lucian A. Bebchuk of Harvard Law 

School and Kevin J. Murphy of the University of Southern California’s Marshall School 

of Business—who were retained by my office to help guide me in making my individual 

and structural compensation decisions. My objective in employing each of these 

resources is a thorough application of the mandated principles to assure that my 

compensation determinations are consistent with the Public Interest Standard. 

By application of the principles to the facts and circumstances underlying my 

determinations to date, I have developed a number of generally applicable, practical 

prescriptions under the Public Interest Standard, including the following: 

(1) Guaranteed income (including guaranteed bonuses) is rejected, except for cash 

salaries at sufficient levels to attract and retain employees and provide them a 

reasonable level of liquidity. These generally should not exceed $500,000 per 

year, except in exceptional cases for good cause shown. 

 

4

 In particular, my office obtained access to independent compensation data from the U.S. Mercer 

Benchmark Database-Executive as well as Equilar’s ExecutiveInsight database (which includes information 

drawn from public securities filings) and Top 25 Survey Summary Report (which includes information from 

a survey on pay of highly compensated employees). 
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(2) The value of any remaining compensation must be tied to performance. 

Accordingly, the majority of each employee’s compensation should be paid in 

stock rather than cash. Under Treasury regulations, this stock will immediately 

vest, but will only be transferable in three equal, annual installments beginning on 

the second anniversary of grant—with each installment redeemable a year earlier 

if the company repays its obligations to the American taxpayer. 

(3) Incentive compensation should be paid if—and only if—an executive achieves 

objective performance criteria approved by a compensation committee comprised 

solely of independent directors. Incentive compensation should be delivered in a 

mix of cash and stock, payable over time and subject to “clawback” if the 

performance resulting in the compensation is later discovered to be inaccurate. 

(4) Each individual’s total compensation must reflect the employee’s value to the 

company and be appropriate when compared with the total compensation of 

similarly situated employees at similar companies. Total pay should generally not 

exceed the 50th percentile of total compensation for similarly situated employees. 

(5) Employees should be prohibited from engaging in any hedging, derivative or 

other transactions that undermine the long-term performance incentives created 

by a company’s compensation structures. 

(6) Significant amounts should not be allocated to compensation components that are 

not performance-based and are difficult for shareholders to value, such as outsized 

perquisites and executive retirement plans. 

Finally, Mr. Chairman, you asked that I identify the variables or considerations 

that are unique to my office. Aside from the principles previously articulated in my 

testimony above, and among the many distinctive aspects of our work, I wish to 

emphasize three unique characteristics of my limited mandate. 

First, our office is charged with assuring both that the companies subject to our 

determinations thrive in the marketplace so that they can repay the American taxpayer 

and that those same companies avoid excessive risk taking that could threaten their longterm viability. To balance those objectives, we have emphasized that the bulk of 

compensation must be performance-based, and depend on the long-term performance of 

the company rather than short-term gains. We have also insisted that total compensation 

must be appropriately allocated and weighted heavily towards long-term structures that 

are tied to performance and easily understood by shareholders and the public. 

Second, a distinctive and critical part of my work is the recognition that the 

authority of the Special Master is limited. In particular, under the pertinent statute and 
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regulations, I do not have the authority to unilaterally alter “grandfathered” contracts that 

companies entered into with employees prior to the enactment of the Recovery Act. I 

am, however, permitted to pursue voluntary restructuring of these contracts, and my 

office has had some success in doing so. For example, the October 22, 2009, 

Determination Memoranda covering Bank of America and Citigroup provided Special 

Master approval of restructured contracts in which employees agreed to forgo 

“grandfathered” guaranteed cash payments for a combination of reasonable cash salaries 

and long-term stock holdings in their companies. We have, however, been unable to 

restructure such agreements in other instances. In those cases, Treasury regulations 

permit me to take these payments into account when determining appropriate prospective 

compensation structures. For example, in my October 22, 2009, Determination 

Memorandum covering AIG, I took “grandfathered” retention contracts into account 

when setting prospective compensation. In particular, as a result of officials’ refusals to 

restructure their cash retention payments, I refused to approve cash salary amounts 

proposed by the company, which, in light of the retention payments, would have resulted 

in an excessive level of cash compensation. Attempting to renegotiate these 

agreements—and, where necessary, taking payments under “grandfathered” contracts 

into account when setting prospective compensation—has been a unique challenge. 

Third, a very unique aspect of my work is the fact that Treasury regulations give 

me the unprecedented responsibility of balancing the principles set forth in the 

regulations to actually make individual compensation determinations for 25 individual 

officials employed by the exceptional assistance firms, and setting the compensation 

structures that will apply to the 26 to 100 individual officials and executive officers. I 

believe that much of the attention focused on my work is directly attributable to this 

fact—not only has my office promulgated generally applicable compensation principles 

and prescriptions, but we have shown that these principles can work in practice by 

calculating individual compensation packages for officials in these companies. I believe 

this is the most “unique” aspect of my work and will hopefully have the most permanent 

impact. 

Mr. Chairman, I thank you and the other members of the Committee. This 

statement constitutes my formal testimony.