policies. that could all be a positive development. 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 the way the rule of law was disregarded in the chrysler bankruptcy case, dangers actions are taking place which would create an even plainfield 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 gentleman from florida for two minutes.

let's hold off. let me go to the gentleman from texas for two minutes. >> thank you, mr. chairman. one of the things that's happened over the last few months is we have formed a new entity is called tse. that tax supported entities. that were the american people were impressed to these shareholders and companies that in many cases they wouldn't have invested on their own, but unfortunately that marriage was made. and i would guarantee you if you think america isn't working very well wait and to see to divorce as we try to unravel these. this looks like we're 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. one of the things that's most important -- embarrassing about all this is that we have people that have never run anything trying to tell companies how to run their own business. we have people that the only risk they may have ever taken is

buy a lottery ticket trying to tell companies how they should move forward with their business plans. i think it's a poor direction for us to move. if we really want to help the shareholders and help the american people, one, we need to get them out of these businesses. secondly we need a radio tour structure that is these bailouts, and the government picking winners and losers. and more importantly begins to put a market discipline into these companies letting them fail there is consequences. if you think shareholders will have an uprising, wait until you think they are about to lose their investment. today we send a signal you may not lose your investment, or more important and more sadly as we say to the merrigan people, guess what, you didn't like to buy shares in that company, we are going to buy them for you because we're the government and we think what we know is the best investment of the american taxpayers money. 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 the people that we are selling, we're going to have to

bite energy from on a daily basis. the american taxpayers are sick and tired of being shareholders. let's get him out of that. let's get an exit strategy. more importantly let's don't let the federal everman encroached in the business anymore than it already has. >> the gentleman from california for two minutes. >> thank you, mr. chairman. i would like to begin by thanking you for facilitating this hearing this morning. executive compensation has been a confiscated and reoccurring issue, and our discussion 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 topics that kids are mind-boggling. former executives such as merrill lynch's john day or countrywide angela mazzella were collecting salaries and notices

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 incentivized to flood the market with predatory loan products such as subprime mortgages. for financial gain and increased 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 turn asset-backed securities, or tal. that money is not a gift but regular alone for about. as such require certain protections. one of these protections is special master who will place transparency into the system so the public and shareholders are properly informed. to the extent bonus compensation poses a systemic risk, get to merit some limits.

i think our witnesses today for having the guts to frame a discussion on which bonus compensation limit may be appropriate to rein in systemic risk. with that said i do not believe noncriminal recipient should have their salaries capped by the president or the congress. thank you, mr. chairman. i yield back the balance of my time. >> one minute, mr. moore? one minute. i apologize. mr. campbell for one minute. >> thank you, mr. chairman. you know, there is no argument that there have been instances, a number of them, in which people and 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 25 year career i will tell you that it's not easy. sometimes you pay people to much work to low performance and sometimes you pay people to little for too much -- for too much, for a lot of performance. and the idea that somehow that

some washington bureaucracy, bureaucrat can do this better than people in the 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 also have improved union contract, major expenditures, etc., all of which arguably have done more to bring companies down over the years that 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 for in the change of directors so that when they get too cozy with management. i go back. >> finally that come in from michigan. mr. peters. one minute. >> thank you, mr. chairman. it is estimated that as many as 100 million americans own stock, either an individual account 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 were receiving compensation package that emphasized short-term gains rather than rewarding long term growth and shareholder wealth. i'm 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 a corporate 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 ibb 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 testimony today. thank you, mr. chairman. >> thank you members and will

begin with witnesses. let me say we have an important subject that we have and always too many members on this committee, and i'm going to hold everybody strictly to the five minute rule. no one will be recognized as a member after the five 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. starman. >> thank you, chairman frank, it's 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 prevalent 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 and other financial institutions to avoid the potential that long term downsides of their actions discouraged a focus on determining long risk and 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, and as secretary geiger said yesterday, our goal is to help ensure there is a much closer alignment between compensation, creation for firms and the economy as a whole. our goal is not to have the government micromanage private-sector compensation. as secretary geiger said yesterday we are not capped and take it we are not setting forth the precise prescription for our companies should that compensation which can be countered productive.

and we come to this with a clear eye sense of both the seriousness and he will be one must bring, both the importance of the issue, but also the care one must take that well-intentioned actions do not lead to unintended consequences. i will mention just a few of the principles that secretary geiger 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, patient 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 up to performance. simply using stock as they say can confuse the brains for it bull market, and on the other

hand not properly reward an executive who may be doing enormously well in a difficult economic times. i think one of the things we should study carefully is what is this careful mix of metric that truly rewards performance in fact and not just in name. secondly, compensation should be structured in line with time horizons. the right time horizon's. a friend of mine said recently it is like there is an entire industry, entire set of financial actors, which are able to realize private games in a single year for risk they are creating over a 30 year period which could be asked to realize to either the 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 is not easy for financial actors to simply put off the

potential harm they could be leading to their firm, their shoulders and the economy as a whole. third, compensation practices should be aligned with sound risk management. now, this authority independent of risk managers within firms, ensuring their independent compensated well, is most important when you are going through a period of excessive optimism, where asset can appreciation can temporarily make the reckless look wise and prudent look overly risk-averse. 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 the 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

parachute and supplemental retirement packages truly align the interests of executives with shareholders. provide executives with substantial amount of stealth compensation, compensation not transparent to shareholders that is largely decoupled from performance. and concerning golden parachute, there is more evidence that they are prevalent, not tied to performance or even mergers and acquisitions. and i fear that they lead -- 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's very important to have greater transparency and independence. say on pay legislation, that chairman frank has long sponsored and which president

obama, as senator obama was a cosponsor in the senate would be a very significant move forward in terms of transparency, accountability, the evidence in the uk shows that it has had a positive impact. and in terms of the independence of compensation committees, i would 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 a comp committee the funding and authority to be the sole hirer's other compensation consultant and the council, and that you have 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. >> thank you. mr. alvarez. >> thank you, chairman frank. other members of the committee for the opportunity to offer the federal reserve's perspective in

the financial services industry. compensation practices of 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, serves 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 executive of excessive risks that are not consistent with a long term health of the organization. business alignment of incentives can occur at all levels of a firm and is not limited to senior executives.

in addition, incentives built on producing sizable amount 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 of acting as a brake 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 complement programs, have become apparent during this period of economic stress. as a result many financial firms are now re-examining their compensation structures to better align the interests of managers and other employees with a 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 these institutions that we supervise consistent with prudent risk-taking 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 industry experts. our investigation 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, traitors, and other individuals who can alter the risk of file of the firm. firms boards of directors and supervisors must broaden the scope of their review of compensation practices beyond the traditional focus of senior executives. second, compensation practices must take account of the risk of the activities and transactions conducted by the firm and not just abb based on targets for short-term profits, revenues or bargain. substantial financial rewards for meeting or exceeding volume, revenue or other performance targets without due regard for 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 met 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 i boards of directors and risk management functions in the design and implementation of compensation arrangements for mise. improvement 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'm happy to answer any questions you may have. >> finally, mr. benny. >> good morning. i am pleased to be with you here today to testify on behalf of the security 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's important to note that as the landscape of compensation practices continues to change, the commission is committed to keeping the disclosure rules we 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 gone under and garnered public attention. claims have been made that bonuses and severance packages at some countries have been exorbitant. executive compensation has been a lightning rod amplified by the recent financial crisis for concerns about the accountability and responsiveness of some board of directors to the interest of their shareholders. we believe that in order for public markets to goshen 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 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 restraint on pay and those who believe the federal government should never, or rarely set a parameter's. it is important to note however that this debate is significantly more meaningful as a result of our disclosure rules. however, that challenge the commission has always faced and promulgating and administrating its executive disclosure rules is that compensation practices are not static. as a consequence, the commission has revised the disclosure rules as necessary to keep pace with new development and compensation practices. most recently in 2006, the commission adopted a copperheads a 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 strengthen 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 interest of management in the form of incentive compensation arrangements and interest of shareholders are not sufficiently aligned. radix 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 measured risk to management compensation should the decision proved costly to the company. indeed, one of the many contribute factors cited as a basis for the current turmoil is the misalignment at a number of large financial institutions and management of financial interest with those 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 and existing compensation plan and levels. 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 to only the highest-paid executive officers. the commission further plans to consider proposing new disclosure requirements regarding compensation consultant conflict 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 this particular

leadership structure such as whether that structure includes independent chair or perhaps combines both the ceo and 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 requirement, however, it has been argued that absent and more effective way for shareholders to exercise their fundamental right to nominate and elect directors to the company's board of directors, board accountability to shareholders cannot be maximized. accordingly, on may 20 the commission voted to approve for noticing comments 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 and a shareholder meeting would subject to certain conditions be able to have a limited number of nominees included in the company proxy to. to further facilitate involvement in the direct nomination project, to require companies to include proposals

related to the nomination process in their proxy materials divided 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 will receive management of the company they own. thank you again for biting me to be here before you today. on behalf of the agency we look forward to working with congress and with this committee going forward on these issues but i would be happy to answer any questions you have. to think of it before i get to question i do want to comment on what we have heard earlier from my republican colleague. i think what we have heard today is the final rejuvenation of the bush administration by many of my republican colleagues because we have heard a fairly vigorous and denunciation of various actions of the administration. no more bailouts. no more takeover 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 advanced $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 the bill because the house passed it and the senate bennett, involving the auto companies the bush administration initiated it. so we are talking now about a bush administration initiations of funding for aig, a bush administration request to congress to create the tarp, and the bush administration intervention without congressional final action for 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 4000 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 consequence decisions made by the bush administration, some of which i agreed with, some of which i agree with the course they weren't well carried out. i would note on the tarp money, that thanks in part to an increase in the conditions that have been imposed on target 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. 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 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. these are competent questions to be worked out, and i would not ordinarily have brought this up but listening to what i heard before, yes we have that with bailouts. the second point i would make is

that seo and pay comes from england. it is not a bailout. the compensation data we are talking about and i find it very critical. it's one thing to have restrictions when people are getting money directly. it's another when we are talking about risk assessment. so i will not ask my question of these three gentlemen. one of the arguments we heard is that if we restrict compensation, it will contribute to capital flight. that people will flee america. it has been my exchange that in the first place american corporate executives were rewarded far better in dollar terms and in other ways than others. sometimes i think the japanese executives and american executives are paid the same amount except in our case it's dollars and in their case is again. so they can dollar difference means they get a hell of a lot more. but i want to ask all three of you, is there a danger if we were to adopt say on pay for some of the other rules that you

are purposing that we would add to capital flight that some of the best and brightest who have run the financial system with such, would not decide that they will not sufficiently appreciated and would move to other countries? many begin with mr. sperling. clas. .