is we are focusing on compensation fraud and performance. and one of the things that's most@@@@@á#g@ @ @ @ @ @ )@ @ @ ü think shareholders will have an uprising wait until they think they are about to lose their investment. today we send the signal you may not lose your investment or more

importantly as we say to the american people guess what, you didn't like shares in that company? we are going to buy them for you because we are the government and we know the best investment of the american taxpayers' money , and by the way we don't have this money. this is money we are borrowing from china and japan and people we are having to buy energy from on a basis. the american tax payers are tired of being shareholders. let's get them out and get an exit strategy and more important let's not let the federal government encroach on the business any more than. >> the gentleman from california >> thank you. i would like to begin by thanking you for facilitating this hearing this morning. executive compensation has been complicated and reoccurring issue in our discussions on financial reform. as you mentioned, compensation that promotes excessive risk is a systemic concern. to that end, what occurs in financial centers such as

manhattan and charlotte affect 71 across the country including residents from my district california. some of the compensation packages that were lavished on top executives are mind boggling. former executives such as merrill lynch john fame or countrywide's angela lizilo were collecting into the millions 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 innocent lives to flood the market with predatory loan products such as supply and mortgages, weaken the prospects for financial gains and increased the 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 capital purchase program the term asset backed securities loan facility or talf.

that isn't a gift but a loan from the public and requires certain protections. one of these protections is a pay star who will place transparency into the system so the public shareholders are properly informed. bonus compensation poses a risk it merits limits. i thank the witnesses for helping frame the discussion on which bonus compensation limits may be appropriately and in systemic risk. that said no t.a.r.p. recipient should have souder is capped by the president or the congress. thank you. i yield back the balance of my time. >> we will do one more minute to mr. moore. i apologize, we will go to mr. campbell. >> thank you, mr. chairman. you know, there's no argument there been instances, a number of them and which people and companies have been paid a great

deal for not much performance. the question is what do we do about it? as someone who has designed compensation plans for hundreds of the employees in my 25 year career i will tell you it isn't easy and sometimes people too much for too little and sometimes paid people to a little for too much performance, for a lot of performance and the idea that somehow some washington bureaucracy, washington bureaucrat can do this better than people in the business and the company is simply ludicrous. also i believe the idea of having a direct shareholder vote opens the idea of direct democracy within corporations which leads to the question should be also have them approved union contracts and 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 and changes in the board of

directors so that when they get too cozy with management and i yield back. >> finally the gentleman from michigan, mr. peters. >> thank you for holding the hearing and for your leadership on this issue. it's estimated as many as 100 million americans owned stock in individual accounts or mutual fund and those investors have lost trillions in the stock market decline. there is no doubt one of the causes of the financial crisis was executive compensation schemes in places of the largest institutions from the top executives to the traders on the floor people were receiving compensation packages that emphasize short-term gains rather than rewarding long-term growth and shareholder wealth. i'm happy the obama administration announced they are taking steps to address the issue by calling on the congress to pass legislation that requires companies to hold advise risch shareholder vote on compensation and mandating corporate boards independent compensation aisers. tomorrow i will be introducing legislation that will do that

and more. will also include a number of provisions i believe will reform corporate governance, practices by in power and shareholders to have a greater oversight over the management of the companies that the unknown. i look forward to hearing testimony today. thank you. >> ai thank the members and we will begin with -- let me say we have an important subject and as always too many members on the committee and i'm going to hold everybody strictly to the five minute rule. no one will be recognized after the five minutes be 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. >> thank you, chairman frank, ranking member bachus. it's very good to be here. i appreciate your holding this hearing. i think there is little question

that one culture bidding factor to the excessive risk that was essential to the crisis was the prevalence of compensation practices at financial institutions that encouraged short-term gains to be realized with little regard to the potential economic damage such behavior could cause of only to those firms but to the financial system and the economy as a whole down the road. compensation structures that permit key executives and other financial restitution is to avoid the potential long-term downside of their actions discouraged focus on determining long-term risk and underlining economic value while reducing the number of financial market participants who have incentive to be the important to navy in the coal mine -- ken terrie in the coal mine. i want to make clear as the secretary said yesterday our goal is to help ensure there's 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 this extradite nursing yesterday we are not capping the pay or sitting fourth precise prescriptions which can be counterproductive. and we come to this with a clear right sense of the seriousness and humility one must bring both the importance of the issue but also the care and writer one must take to ensure well-intentioned actions do not lead to unintended consequences. i will mention a few of the principles the secretary geithner linda out, 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 page should be performance related but it is a lot more complex to find out what is the right mix of metrics that ensures that it is true performance? simply using stock as they say can confuse brains for a bull market and on the other hand not properly reward an executive who may be doing enormously well in a difficult economic time. negative one of the things we should study carefully is the mix of metrics that rewards performance in fact and not just the name. second, compensation should be structured in line with time horizons. the right time horizons. a friend of mine said recently it is like there is an entire industry, in tire sets of financial actors which are able to realize private gains in a single and you're for risks they are creating over a 30 year period which could be externals

by east to either the firm or as we have seen the economy as a whole. we need to have structures that help internalized 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, shareholders and economy as a whole. third, compensation practice should be aligned with sound risk management. now, this authority independence of risk managers within firms issuing their independent compensated well is most important when you're going through a period of excessive optimism where asset appreciation can temporarily make the reckless look why is and prudent look overly risk at first. former federal reserve chairman william chesney martin said the job is to take away the punch bowl 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 from the aligned the interest of executives with shareholders. bebchuk will be speaking to provide its tickets with substantial amounts of stealth compensation not transparent to shareholders that is largely decoupled from performance. and concerning golden parachutes, there is more evidence they are prevalent, not tied to performance or even mergers and acquisitions, and i fear that they leave the understandable in persian

there's a double standard in the economy when the top executives are rewarded for failure at the same time working families are forced to sacrifice. finally, we believe that it is important to have greater transparency and independence. the sale on pay legislation chairman frank has long sponsored which president obama and senator obama was a co-sponsor and senate would be a very significant move forward in terms of transparency and accountability, the evidence in the u.k. shows it has had a positive impact and in terms of the independence of compensation committees i will say briefly we start with the same premise s chairman frank that independence in the name doesn't mean in fact but we do believe if you gave the committee the funding and the authority to be the haulier some of the compensation consultants and the council and you had the sec go forward to

ensure reduction or elimination of conflict of interest for compensation consultants it is our hope we would at least make progress and move the ball forward. thank you. >> thank you, mr. alvarez. >> thank you for the opportunity to offer the federal reserve's. compensation practices and financial firms and other business organizations can have a significant effect on the safety and soundness of banking organizations and on financial stability. compensation of arrangements which include a salary, bonuses, retention bonuses and other forms of compensation and any type of organization serves several important and worthy objectives. for example they are important for attracting skilled staff, promoting better firm and a 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 executive stanton police with incentives to take excessive risks that are not consistent with long-term health of the organization. this misalignment of incentives can occur at all levels of the firm and is not limited to senior executives. in addition, incentives built on producing sizable amounts of short-term revenue or profit can encourage and police 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 loan of acting as a brake on excessive risk-taking where compensation programs have created overly strong incentives to take risks. these and other weaknesses in the ways firms have bought about and implemented compensation programs have become apparent

during this period of economic stress. as a result many financial firms are now re-examining the compensation structures to@ã consistent with prudent risk-taking and safety and soundness. in developing this guidance we are trawling on expertise within the federal reserve as well as research from the brought it to

the community and other compensation industry experts. our investigations suggest there are certain 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 the 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 the review of compensation practices beyond the traditional focus of senior executives. second, compensation practices must take account of the risks of the activities and transactions conducted by the firm and not simply be based on target's for short-term profits, revenues or volume. substantial financial awards for meeting or exceeding revenue or

other performance targets without due regard for the risk of the activity can create incentives to take on sound risk. moreover incentives that reward good performance but do not adjust compensation downward when risks or increased or performance targets are missed or not effective in limiting risk. third, or 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 world board of directors and risk-management functions in the design and implementation of compensation arrangements firm wide. improvements and compensation practices are likely to be harder to make and take longer than anyone would like. one slice will not fit all. however well crafted a supervisory principles can play an important role in moving practices in the right direction. i appreciate committee's interest in this important topic

and am happy to answer any questions you may have. >> finally on behalf of the sec, mr. breheney. >> good morning mr. frank, mr. bachus and other members. i am pleased to testify on behalf of the securities exchange commission so i may share our thoughts on the topic of executive compensation. as an initial matter it's important to note as the landscape of compensation practices continues to change the commission is committed to keeping disclosure rules we administer up-to-date so investors have the information they need to make informed investment in voting decisions. as we all know in recent years to issue a fixed compensation has started sicced at the cannes public attention as revelations about executive compensation come to light claims have been made bonuses and severance packages at companies have been exorbitant. indeed expected of compensation has been a lightning rod amplied by the recent financial crisis with concerns about accountability and responsiveness of some boards of directors to the interest of the

shareholders. we believe in order for the public markets to function properly it is crucial shareholders, the owners of the company be able to make informed decisions about their investments and shareholders can hold the members of the board of directors accountable for their decisions. notwithstanding the current rules we've revised is an ongoing vigorous debate between those that believe there should be more substantive restraints on pay and those who believe the federal government should never or really set papery matters. it's important to note however the state is significantly more meaningful as a result of the disclosure rules. however the challenge the commission has always faced and promulgating administering executive compensation disclosure rules is compensation practices on all static. as a consequence the commission has revised the rules as necessary to keep the pace with new developments in compensation practices. most recently in 2006 the commission adopted comprehensive package of amendments to its rules intended to significantly

improve the existing regime of executive director compensation disclosure. one of the adoption in the 2006 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 some company's executive compensation has become disconnected from long-term company performance because the interest of management in the form of incentive compensation arrangements in the interest of shareholders are not sufficiently aligned. critics have complained in some cases the incentive structure created by executive compensation may have to of a management to make decisions that said that complete and inappropriately increase company risk without commensurate risk management compensation should the decision prove costly to the company. indeed, one of the major country in factor site as basis for the current market turmoil is misalignment at a number of large financial institutions of management's financial and tryst with those of shareholders.

compensation policies and incentive arrangements represent one of the issues e 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 the company's key policies, procedures and practices for example, the commission plans to consider whether greater disclosure is needed about how a company and company's board in particular manages risk in putting within the context of a existing compensation plans and setting compensation levels. the commission also plans to consider whether greater disclosure is needed about overall compensation approach in particular as it relates to the risk management and risk-taking beyond decisions with respect only to the highest paid executive officers. the commission for the plans to consider proposing new disclosure requirements regarding compensation consultant conflicts of interest and 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 the board has chosen its particular structure such as whether the structure includes independent share or provides both ceo and the chair in one position. again so they can better evaluate the board when making a decision. notwithstanding the executive compensation disclosure requirements however it's been argued absent more effective way for shareholders to exercise fundamental right to nominate and elect directors to the company's board of directors board accountability to shareholders can all be maximized. according the on may 20 if the commission voted to approve for noticing comment proposals the would give shareholders and more effectively to exercise their states' rights to nominate directors. under the proposal shareholders who otherwise have the right to

nominate directors at a shareholder meeting but subject to certain conditions be able to have a limited number of nominees included in the material sent to all voters. to further facilitate shareholder involvement in the director nomination process the commission proposed amending shareholder proposal rules to require companies to include proposals related to the nomination process and proxy materials provided the requirements of the rule are met. if adopted we believe these rules would offer shareholders a stronger voice determining who oversees the management in the companies they own. thank you for inviting me to appear before you today to get on behalf the agency we look forward to working with congress and this committee going forward on these issues and i would be happy to answer any questions you have. >> i do want to comment some of what we heard earlier from my republican 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 denunciations of various actions of that administration. no more bailouts, no more taking over companies. well, aei g.i. remember into timber 2008 been told by sector paulson and chairman bernanke, two bush appointees they decided with no congressional input or advice to advance 82 bill in dollars to aig. today's later we were asked to initiate the t.a.r.p. program. subsequently worked with the bush administration and after zero and we were unable to pass the bill because the house passed and senate didn't involving the auto companies the bush administration initiated it, so we are now talking about a bush administration initiation of funding for aig. a bush administration request to congress to create the t.a.r.p. and the bush administration intervention without congressional final action in the auto companies.

.. more than one-third of the money advanced to banks had already been paid to the treasury. we have to decide what we do with that but does consider the whole 700 billion gone have to cope with the fact that

approximately 200 billion advance in less than a year and more than 70 billion has come back some of which exceeded the loans because there was interest. these are complicated questions to be worked out and i would not ordinarily have brought this up but listening to what i heard before, yes we have had a problem with bailouts for the second point i would make is that say on pay comes from england. it is not some intervention. it is not a bailout. the compensation matters we talked about, is one thing to have fair of compensation restrictions when people are getting money correctly. it is another when we are talking about risk assessment 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 flight, that people will flee america. distant my experience in the first place american company-- corporate executives were awarded far better in dollar terms in other ways than others.

sometimes i think the japanese executives and the american executives are paid the same amount except in our case it is dollars and in their case it is again so the difference means a lot more, but i would ask all three of you, is there a danger if we world of say on pay or some other rules you are proposing that we would add to capital flight that some of the best and brightest to live from the financial system with such-- would now decide that they were not sufficiently appreciated and would move to other countries? i will begin with 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 in the kind of deterioration that you mention, but as far as i know, i can say for certain, 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. >> i want to talk specifically about the competitive peace. >> i do not believe anything we are proposing today or you have proposed would have a deterrent-- >> mr. chairman 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 principles similar to what we have discussed today. let's imagine the board is worked on the international panel, so this is a global issue

with a global set of solutions that the globe is coming to consensus on. >> thank you. mr. backus. >> mr. chairman, your earlier remarks, i would just say whether we ted this on bush, sort of pin the tail on the donkey or whether we pen it on the elephant, it is no all our problems and it is no, it is not then and i just ask that we all work together to get us out of this, these bailouts in these government-funded programs that we extricate ourselves from that and the deficit spending that we have witnessed. we will workogether on that i hope. let me say this. gene, you and i have worked on several things. i have a deep respect for you and i am very much agree with you that one of the contributing