public companies are much weaker than other common countries. we need to introduce safe for 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 companies state of. finally, in the case of executive pay in banks, or more generally any financial firms that pose systemic risk. here the government should have a broader role. . .

regulators should monitor and regulate executives' 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. >> next, the former chief accountant of the securities and

exchange commission. >> 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 the your colleagues in the senate did not share the same wisdom and so as they say-- >> there is a lot of that going around. >> we are back. in the views i expressed 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 semiconductor 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 for entrepreneurs chip is very important, perhaps one of the few of not only person at the table today with that type of experience and perspective. there's no doubt in my mind when it comes to influencing people's behavior at the top level and the low level there's nothing

like paid the drive so people do. when you give people pay that drives short-term performance as we did on wall street, where it was very low base in 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 do you can't avoid it. if you want long-term thinking and long-term shareholder values 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 relief reining in the compensation, so we have got 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 would just ask the chairman to include the full written testimony for the record. >> without objection, all of them will be included. >> in the area transparency at think we have to start with the sec enhancing disclosure of compensation arrangements and in particular today that 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 qwest 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 a voluntary a couple years ago, about half the companies give it, half the companies don't. we needed from all of the companies on inappropriate level of detail. that includes, we need to get back to figure out what the value of the real equity grants are when they are given a we have laws that. we need to have disclosure about the compensation consultants and whether not they are truly independent, are they being hired directly by the community 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 have still got a lot of public pension funds, corporate plans, hedge funds that are not disclosing how they are voting on this stuff and we need to bring transparency to it. at a public pension fund that i sat on that has 30 billion of assets we recently went to disclosing our boats just so all of our members and people could see how we vote and we think that sets accountability. if we don't do it right we will 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 do that is government intervention in any way shape or form into the question whether not that would drive people offshore, i absolutely don't believe it will try people

offshore. many other countries around the world, australia, netherlands, the u.k. 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 nonsense the ball. we do need to get their shareholders in mutual funds voting in the best interest of investors osi seven my testimony, almost 90% of the time to mutual funds, the fidelity's, the barclays, the elian spots 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 interests and fidelity, barkley, all men is a tremendous amount of money for these large companies with tremendous these. that is not disclosed and isham time and time again the vote that way so i certainly encourage say on pay, do

something about the mutual-fund voting, elimination of broker votes that the sec has said they are going to do. i think we need to get to the majority voting in the right for shareholders to also remove directors when they have not gotten the job done. thank you mr. chairman. >> nefcom month professor murphy from the university of southern california. >> thank you chairman frank. we are here today in large part because we are angry that merrill lynch and aig paid huge bonuses after the bailout funds. our anger coupled with their suspicions that the culture is the root cause of the ongoing financial crisis has led to an effective prohibition on cash bonuses for tire percipience and is leading us today towards more sweeping regulation of compensation in financial services firms. i agree there are problems with compensation structures in the financial firms and most other sectors but is my opinion the constraints already currently on tire percipience will likely destroy those organizations unless they can quickly paid the

government and avoid the constraints. margaret is my opinion that regulating compensation and financial-services more broadly will cripple one of our nation's most important 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 fix cost under control by paying low base salaries and pay most of the compensation and 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 and stock options. the primary way such structures can encourage excessive risk-taking is through asymmetric awards 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 of earning a zero bonuses actually

penalty and bonuses to fall on bad years. average bonuses for executives in the t.a.r.p. recipient firms or 82% lower in 2008 and 2007. take away bonus opportunities in the banks will have to raise salaries are find other ways to pay or they will lose their top talent. executives and financial firms receive much of their compensation in the farm-- form of options in these instruments provide penalties for failure. the average intrinsic value of options held by executives in t.a.r.p. recipient firms fell by, 94% from 2007 to 2008 and the value of their restricted stock holdings fell by 72%. the statistics on include firms that continue to operate at the end of 2008, thus ignoring the losses incurred by executives at bear stearns, wachovia and any other casualties in the crisis. given the existing penalties for failure there's nothing inherent in the current structure that

leads two of these incentives to take excessive risks. to the extent the firm's indeed took such risk we need to look down the pay structure to explain. in particular the role of bonuses is like the forced by the roles of loose monetary policies, social policies on homeownership and poorly implemented financial innovations such as exotic mortgages, securitization and collateralized debt obligations. i'm especially concerned about offering too big to fail guarantees that provide enormous incentives to take risks. but this is not a compensation problem. another way compensation can lead to risk-taking is there and a appropriate performance measures. for example consider mortgage brokers pay for writing loans rather than writing loans that the borrowers representative actually payback but we saw this happen at washington mutual, countrywide in wachovia and scores of smaller lenders it weren't overly concerned about the default risk as long as hong prices kept rising and as long as they could package their loans and sell them to wall street for the resolution to

this problem is to pay people to write it loans and penalize them for writing bad loans. the challenge is identifying a good long without waiting up to 30 years to see whether the loan is repaid. the answer involves bonus-- 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 sets into the judgment of the government for the business judgment of the directors and this is a dangerous path to go down. in conclusion it is not my opinion current compensation practices are optimal. for example on his plans could be improved by introducing and in forcing the bundesbank set in clawback provisions and making sure reward long-term creation rather than short-term results. this can be improved by allowing more rather than the subjectivity indiscretion however i believe regulation will systematically make things worse rather than better.

indeed washington has a long history of attempts to regulate pay including cav son call on parachutes in the 1980's, the million-dollar pay gap in the 90's, more recent restrictions on deferred compensation and the most recent and straights ontare percipience. each of these attempts has created unanticipated side effects that have led to higher levels of pay and less efficient a delivers. i strongly recommend the committee consider carefully this history before inevitably repeating mistakes of the past. thank you. >> thank you professor. >> chairman frank, ranking member bachus and distinguished members of the committee is a privilege to testify in this form today. my name is g.w. verret. i am a senior scholar at the mckay dissenters financial markets working group. i also direct the corporate federalism initiative, a network of scholars dedicated to studying the intersection of state and federal authority and corporate governance. before i begin i also want to

say it is a particular honor to testify on a panel with professor bebchuk to was my mentor and without his guidance i would not be a law professor today. today want to discuss compensation proposals currently under consideration. i will also highlight a wall street norm of issuing and feeling pressure to meet, quarterly earnings guides which is a central cause of short-term tunnel vision for wall street's it is. the roll executive compensation plays in the current crisis is in fact unclear. there is little difference, and this is key, there was little difference between the executive compensation approaches of banks healthy enough to repay their t.a.r.p. funds and those of banks likely to need additional objections of-- injections of capital. the differences between executive compensation and healthy banks and executive compensation at bad things 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 the compensation committee's flexibility to achieve this important goal. there are no less than seven executive compensation initiatives either proposed or recently underway for the such a wide array of ideas from this corner offers to repeat the lack of coordination that contributed to the present crisis. the multitude of proposals also threatens to override to important sec driven disclosure initiatives that offer some sort of significant promise in this area. four at ceitci chairman cox completed an extensive overhaul of compensation disclosure in 2006 and chairman schapiro is promising further changes. congress should study the effect of these disclosure rules before instituting prescriptive regulation. i would also add that they should think about setting disclosure rules on-- sec should

study disclosure rules for proxy advisory forms which is notably missing from the current proposal. i would echo professor murphy's warning about the effect of unintended consequences and be seen them before. lawmakers sought to limit the disparity in pay between executives and the average worker. the result was that-- was quite the opposite. executive compensation increase exponentially by name the gap between executives and the average worker. to offer unintended consequence are the apparent for the current reform effort the restrictions that made it harder for american banks to retain talented executives. immediately following the announcement of the restrictions by the obama administration, deutsche bank posted swell the bank of america's ties performing executives and ubs yes compensation increases as high as 200%. this is a swiss bank, to hire away financial advisers. the greatest risk to the safety and soundness of the nation's banking system is not compensation but short-term

thinking. compensation is up companies may motivate executives to look short term but the real question is why do companies pursue short-term goals in the first instance? the wide except the convention of predicting quarterly earnings drives the short term approach. pension funds, mutual funds and company issuers all expressed dissatisfaction with the pressure to predict quarterly earnings but companies feel that voluntarily opting out will be taken as an negative signal. pressure to make quarterly predictions about 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 rehabbed 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 had time to

work. i thank you again for the opportunity to testify and look forward to answering your questions. >> i will just began with one historic in accuracy. you said we are here because of merrill lynch it cetera. in fact, the democrats in this committee raise the say on pay issue in 2006, and in fact the house passed say on pay in 2007, back when i thought t.a.r.p. is what you use to cover the infield when it rains. so historically the causality is not as you suggested. now, let me ask, your general sense is that you have simply got to make its less difficult to replace board members, that that is, that that is the centerpiece and other things are not going to work out if you don't have a board that is more sensitive? >> yeah, i do think that is right but you also up to have

shareholders who are capable of exercising that authority. >> that is what i mean. the key is not say on pay but say on boards. >> it is kind of a forest trees thing. and me focus on compensation and get down to the fine details of whether option should be indexed for not or whether they should be tied to quarterly earnings are not, i think we are missing the big picture. >> say on pay would do that, so you think say on pay is a step forward, but in the absence of the kind of-- let me ask you, because we will get to corporate governance later on. maybe, the current sec proposal they talked about-- >> i think that, it is my opinion, i know the sec does not agree with me that they are going to need legislative clarity on that point but yes, i

think proxy access would be very meaningful but i also support the majority vote. >> let me ask you about something that puzzles me, and that is, we have the ceos and other top decisionmakers telling us that part of the problem is we have to align their interests with those of the company. is there something about their character that is lacking, that says we have to take extra steps to align their interests with those of the company? in the normal course of economic life, we kind of assume that your interest will be aligned with the people who are paying your salary and 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 lived in fact fought hard to get these jobs that somehow they will not align their interest to those of the company and we have to design special incentives. could we expect them to have their interests aligned with the

company even if there were these incentive bonuses and let me start mr. verret. >> mr. chairman it is not about aligning the interests. >> my question is, the world may not be, a lot of things aren't. this course of the red sox game is not about that but my question is because one of the justifications with getting these forms of compensation is, it is necessary to align the interests 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. chairman i appreciate your red sox reference. i am a red sox fan as well. i think the issue is oris. >> essences 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 e zone and away to walk. sometimes we want these ceos to swing for the offences. >> but that is the right thing to do, why shouldn't they do

that? by the way, to take your 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 be depending on the inning. if the bases are loaded, no we don't why do you to swing for the fences. there less risky ways. 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 specular the-- special incentive to put the company's interests verse? >> because as you know some players like to take the easy way out. some players can take risks for the good of the team. >> so, but we don't usually do that with our employment system and with compensation. let me ask others, does anybody know what it is about chief executive so financial companies that means that they have to get special bonuses to align their interests? mr. markey? >> i will try to answer the

question-- >> try to answer the question, excuse me mr. murphy, i ask you a question. if you don't want to answer, you can pass. does anyone else want to answer the question? >> precisely, the question is, they say they want to align their incentives because it is the human capital driven organization. >> okay, but the answer is-- well, first of all women do uniform things, you greatly exaggerated particularly since american companies pay much more than other companies. is that something that mr. turner, would you want to try to answer that? >> yeah, chairman frank, we all wish everyone acted in the same way but my experience is and i have worked with many executives including executives of financial companies. some to put the shareholders and the company first and other executives but their own interests first, and that is just people being people. because of that, we have to put a system in, and in this country

we put in corporate governance. we know what we put in today has not worked. the compensation committees have not worked so in light of that it is very reasonable-- >> i agree but-- >> but not everyone is the same way. >> 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 of the call their bluff they would probably still keep doing it. benjamin from delaware. >> thank you mr. chairman. i was interested and intrigued by your testimony, until you admitted you rate red sox fan. you should know the fellow from philly-- you ought to think about who you are cheering for out there. one of the things that you stayed in your writing and 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 this this concerns me. i don't know if you have any ideas about how to change that. do we ask them not to publish it or do it once a year or something to make it longer range? i am of the plea that is a greater driving force in the managing of a corporation that even the salaries are, and i'm not sure how we should approach that unless-- how we should approach nor the state should be approaching it but the question is, do you have any thoughts about any solutions to what a lot of as few as a problem? >> i appreciate your question representative castle and the unique thing about this issue is it is something that everyone agrees on, the chamber of commerce, the pension funds say we hate to quarterly earnings guides. when you ask them privately they say we don't like amina but we feel pressured to do it. if we feel what abuzz with the first one to stop, this is because of the bad news about quarterly earnings and that is why do you are stopping. before this crisis that things are beginning to change.

about 10% of companies stopped providing quarterly guidance. berkshire hathaway stock. in fact warren buffett said it is both deceptive and dangers for ceos to predict growth waits for the company's and that 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 a thing to the extent we want to lift restrictions in t.a.r.p. on executive compensation i think it could be tagged. we could save your a tire company and you adopt a bylaw that, and it by law that is in accordance with legal and under your state corporate law obligations, a legal corporate bylaw, that says we will no longer provide quarterly earnings guidance. the sports can do that. then perhaps we give them some sort of a reward, a carrot

rather than a stick under t.a.r.p. because they have taken steps to limit systemic risks. i think that might be one way of eglise were talking about. >> let me shift back to the subject of the hearing today, which is the executive compensation questions, and just ask you about the governance of all of that. i am concerned that the 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 we will work away from that. we seem to be going even further in that direction with the various things i am hearing in the states for years have handled matters of corporate interest and corporations, etc. and my concern is of a sudden we are asking the government to come in and over ride with the state's mayor nut may not do. 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 and in terms of what we as a federal government and executive branch and congressional branch should do versus what should be done at the state levels. if any thing in the area of executive compensation. >> to the extent that this discussion has gone towards proxy access and say on pay as important aspects of the discussion i think state law does play a very important role. with respect to a proxy access, the sec's crooner 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 of that to make sure that they don't inflect-- conflict with what the sec is the single approach a proxy access the breathing should work for all of the over 4,000 publicly trading companies in the united states. i think it is about 4,000, is my

guess. 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 the change that companies, a small subset of shareholders have not been able to achieve through proposals. just last year's 70 proposals for sale and they were introduced in 2008. ten and the more successful. the average vote was a 60% vote against say on pay by the shareholders. 70% was the average bode against say on pay as financial companies so shareholders, at least your elders of the majority of companies in a strong majority way have expressed dissatisfaction with say on pay proposals. >> thank you. my time is up. i yield back. >> i recognize the gentlelady from california. >> thank you very much. i think part of what i was interested in has been answered. i basically take the position

that government perhaps should not be involved in deciding the compensation for executives of these companies, but i do believe that, when you have the banks and financial institutions coming to the government and excepting t.a.r.p. money, accepting investment by the government, that they have to accept some of the rules of government to go along with it. ..