[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





                 EXECUTIVE COMPENSATION OVERSIGHT AFTER
                 THE DODD-FRANK WALL STREET REFORM AND
                        CONSUMER PROTECTION ACT

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 24, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-160











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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel



















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 24, 2010...........................................     1
Appendix:
    September 24, 2010...........................................    35

                               WITNESSES
                       Friday, September 24, 2010

Alvarez, Scott G., General Counsel, Board of Governors of the 
  Federal Reserve System.........................................     4
Baily, Martin Neil, Senior Fellow, The Brookings Institution.....    22
Cross, Meredith B., Director, Division of Corporation Finance, 
  U.S. Securities and Exchange Commission........................     5
Steckel, Marc, Associate Director, Division of Insurance and 
  Research, Federal Deposit Insurance Corporation................     7
Stuckey, Darla C., Senior Vice President, Policy & Advocacy, 
  Society of Corporate Secretaries and Governance Professionals..    25

                                APPENDIX

Prepared statements:
    Alvarez, Scott G.............................................    36
    Baily, Martin Neil...........................................    49
    Cross, Meredith B............................................    60
    Steckel, Marc................................................    70
    Stuckey, Darla C.............................................    86

 
                    EXECUTIVE COMPENSATION OVERSIGHT
                          AFTER THE DODD-FRANK
                         WALL STREET REFORM AND
                        CONSUMER PROTECTION ACT

                              ----------                              


                       Friday, September 24, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Watt, Moore of 
Kansas, Green, Hodes, Ellison; Bachus, McHenry, Posey, and 
Lance.
    The Chairman. The hearing will come to order. I apologize, 
I lost track of the time, and I am sorry. We will begin with 
the gentleman from Texas, Mr. Green, for an opening statement 
for 3 minutes.
    Mr. Green. I thank you, Mr. Chairman, and I thank the 
witnesses for appearing today. I am honored, Mr. Chairman, that 
you called this hearing and I thank you for doing so.
    I would like to mention very briefly a few pieces of 
statistical information that I think are exceedingly important. 
Currently, we have in this country a poverty rate that consumes 
about 43.6 million Americans. And this poverty rate is 
juxtaposed to persons who are making inordinate amounts of 
money and paying a capital gains tax. The numbers speak for 
themselves.
    We had in 2007 a person who made $69.7 million working for 
one of our leading firms. And by the way, I salute people who 
make large amounts of money. I want people to make as much as 
they can honestly earn. But it is interesting to note that 
$7.25 cents an hour, what this person has made in 1 year would 
take a minimum-wage worker 4,878 years to make. That person who 
made the $69.7 million is making about $9.3 per second. And, of 
course, this person has reason to envy the hedge fund manager 
who in 2007 made $3 billion, which would take a minimum-wage 
worker about 198,000 years to make, as the person making the $3 
billion makes roughly $400 per second.
    Finally, I had mentioned the hedge fund manager who made $4 
billion in 2009 which would take a minimum-wage worker 265,252 
years to make, the hedge fund manager making about $534 per 
second.
    I mention these not because I begrudge the persons who make 
these sums of money. I mention it because we have people in 
this country who work very hard, who make minimum wage, and it 
is very unfortunate that the people who support the maximum-
wage earners, the persons who can make these hundreds of 
dollars per second, $400 per second, $534 per second, support 
the maximum-wage earners but would eliminate the minimum wage. 
Support the maximum-wage earners paying a capital gains tax of 
15 percent, but would eliminate the minimum wage. The minimum-
wage workers deserve as much consideration as the maximum-wage 
workers. I stand for helping both, and I will not allow the 
minimum-wage workers to be left behind.
    I yield back the balance of my time.
    The Chairman. The gentleman from Florida is recognized for 
how much time--
    Mr. Posey. I thank you, Mr. Chairman. And I want to thank 
you for calling this hearing.
    The Chairman. Three minutes for the gentleman from Florida.
    Mr. Posey. I want to thank you for calling this hearing, 
Mr. Chairman. This is a subject which has long interested me. 
When we had the major bank CEOs here, one of the members asked 
them for their compensation and they said what it was. And then 
they were asked what it was the year before as the ship was 
sinking and, to be sure, they included bonuses, and they went 
from I think about $12 million to $60 million, something like 
that. I wouldn't want to be held to that. And it left you to 
wonder, obviously, if one of them had gone down in a plane 
crash, if in fact their stockholders would have been hurt to 
the tune of $12 billion, $20 billion, $60 billion in their 
absence.
    So the question that begs for an answer, of course, is what 
relationship there is between the people on these compensation 
committees and the people they compensate? I hope you will 
address that in your remarks today and we will discuss it in 
questions: How much transparency is there now? How much 
transparency is opposed? Have there ever been any findings or 
prosecutions for an improper relationship for which the 
citizens, the stockholders, suffered?
    Those are some of the interests that I have and that I hope 
you will address today. And I want to thank the chairman again 
for holding this hearing.
    The Chairman. Any other requests for time on our side? If 
not, I will just take a few minutes to say that the genesis of 
this hearing, frankly, was an article in the New York Times by 
Robert Shiller with whom we have had good conversations, in 
which he wrote that he thought executive compensation had to be 
addressed, and I noted that we had in fact done that. He wrote 
about the Squam Lake Group which consisted, as I recall, of 
economic officials from the second Bush Administration, I 
believe, and the Clinton Administration not currently involved.
    And we noted that we had done some things, and I invited 
them to come and testify. We have given the regulators 
authority and we would like them to talk about how they are 
going to use it. One thing we should be clear on: At no point 
did any of our legislation, either on say-on-pay, which applies 
to all corporations or the more specifically financial ones 
here, have we addressed the dollar amount. That is not our job 
and we do not try to fix the amounts. We did, in the say-on-
pay, try to empower the shareholders. In this, the financial 
area, the problem is not the level but the incentive. There is 
a widespread view among many analysts and subscribed, it seemed 
to be, by all the regulators including those appointed by the 
Bush Administration and the Obama Administration, that the 
incentive structure was the problem. That a problem of heads I 
win, tails I break even, did not appropriately incentivize 
people.
    So what the legislation does is not in any way to set 
dollar amounts or authorize anybody to set dollar amounts but 
to deal with the question of the incentive structure and try to 
empower the regulators and to mandate them to so structure the 
rules so that people are not incentivized to take risks 
excessively, by which we mean assist, whereby people take a 
risk and if it pays off, they do well; and if they take a risk 
and it does not do well at all, they break even. That is not a 
rational incentive structure.
    And so we are pleased to have with us a couple of 
economists who have been--one of the economists who has been 
involved in this and also someone from the industry. And that 
is the genesis of this hearing, it did come from an article by 
Professor Shiller and a representative of the group, the Squam 
Lake Group, will be here.
    We have given the authority to the regulators and we want 
to talk about how it should be used.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. General Counsel 
Alvarez and Directors Cross and Steckel, I am not sure how you 
were assigned the job to draft these rules, but I suppose you 
are going to use your real names on the draft; is that right? I 
guess it is a thankless job and it is a difficult job, but it 
could be more difficult if you were charged with looking into 
the pay of athletes or entertainers. So there is probably some 
silver liner there.
    Obviously, this is a subject that is very popular and 
almost everything has been said about it that can be said, but 
at least this hearing, the scope of this hearing is limited to 
executive compensation oversight after the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, so this hearing is 
limited, and I think maybe something newsworthy will come out 
of the hearing.
    We look forward to your testimony, but I know you have a 
difficult job and there are literally thousands of different 
opinions on what you ought to do. And it is a difficult 
subject. I thank you.
    The Chairman. Any further requests for time? If not, we 
will begin with our witnesses and we appreciate their 
testifying. We should note that when we originally called this 
hearing, the assumption was the House would be in session. It 
is not, and therefore you have fewer members, but that may or 
may not distress you.
    I remember touring a Hollywood studio in 1981 in my first 
year, because I was on the Judiciary Committee and dealing with 
copyrights and they were giving me a tour of the studio. They 
were making a movie with Nastassja Kinski, and I forget who 
else, and it involves people who turned themselves into 
panthers or who were turned into panthers by some other force. 
And when we toured the site, the people from the studio 
apologized to me because the panthers weren't there. I said I 
wanted to be very clear. As far as I was concerned, no one ever 
had to apologize to me for not putting me in the presence of 
panthers.
    And so maybe, that is the way the witnesses feel; no 
apology is needed for the fact that there are fewer panthers 
here than there might otherwise be. But in any case, we do 
appreciate their coming, and we will begin with Scott Alvarez 
and your statement, Mr. Alvarez.

   STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Alvarez. Thank you very much, Chairman Frank, Ranking 
Member Bachus, and all the members of the committee. I 
appreciate the opportunity to discuss the oversight of 
incentive compensation practices, an area in which the Federal 
Reserve has undertaken significant initiatives.
    Incentive compensation is an important and useful tool for 
attracting and motivating employees to perform at their best. 
At the same time, poorly designed or implemented compensation 
arrangements can provide executives and other employees with 
incentives to take imprudent risks that are not consistent with 
the long-term health of the financial organization. To help 
address these problems, the Federal Reserve led the development 
of interagency guidance on incentive compensation that was 
adopted by the Federal banking agencies last June.
    We are also close to completing a horizontal review of 
incentive comp practices at large complex banking 
organizations. Section 956 of the Dodd-Frank Act provides 
important support to these efforts by requiring that the 
Federal banking agencies, the SEC, the NCUA, and the Federal 
Housing Finance Agency prescribe joint standards governing 
incentive compensation.
    The guidance adopted by the Federal banking agencies is 
based on three key principles:
    First, incentive comp arrangements should provide employees 
with incentives that are appropriately balanced so they do not 
encourage employees to expose their organizations to imprudent 
risk.
    Second, these arrangements should be compatible with 
effective controls and risk management.
    And third, these arrangements should be supported by strong 
corporate governance, including active oversight by the 
organization's board of directors.
    The guidance applies to senior executives. It also applies 
to non-executive employees who either individually or as a 
group have the ability to expose the banking organization to 
material amounts of risk. The guidance recognizes that 
activities and risks may vary significantly across banking 
organizations and across employees within a particular banking 
organization. As a result, one approach to balancing risk and 
reward will certainly not work for all.
    Moreover, the guidance includes several provisions designed 
to reduce burdens on smaller banking organizations. At the same 
time, in order to help ensure that large banking organizations 
move rapidly to bring their arrangements into compliance with 
the principles of safety and soundness, last fall the Federal 
Reserve initiated a special horizontal review of incentive comp 
practices at a number of large complex banking organizations. 
We are currently reviewing a substantial amount of information 
collected in this horizontal review and expect to provide each 
firm with individualized feedback this fall.
    After the assessments are completed, implementation of the 
incentive comp plans will become part of the supervisory 
expectations in normal supervisory process for each of these 
organizations. Firms have put forth significant effort to find 
constructive solutions to the issues we and they have 
identified.
    In addition, over the course of the horizontal review, we 
have observed and encouraged real, positive change in incentive 
compensation practices. While significant improvements have 
been achieved, it should not be surprising that time will be 
required to implement all the improvements that are needed, 
given firms' relatively unsophisticated approach to risk 
incentives before the crisis, the complexity of compensation 
issues, and the large number of employees who receive incentive 
comp at large banks.
    Importantly, the Federal Reserve expects large complex 
banking firms to make significant progress to improve the risk 
sensitivity of their comp for the 2010 performance year. After 
2010, the Federal Reserve will prepare and make public a report 
on trends and developments and incentive comp practices at 
banking organizations in order to encourage improvements 
throughout the industry.
    Section 956 of the Dodd-Frank Act supports these efforts 
and improves the ability of Federal regulators to collect 
information about incentive compensation arrangements at a wide 
range of financial firms.
    The Dodd-Frank Act also empowers the appropriate Federal 
agencies to prohibit any type or feature of incentive comp 
payment arrangements that encourage inappropriate risks by a 
covered financial institution. By expanding the scope of 
coverage to include many large nonbanking firms, as well as 
supporting the Federal banking agencies' efforts, the Dodd-
Frank Act helps level the playing field and reduces the 
potential for sound practices at banking firms to be undermined 
by arrangements at other financial competitors.
    I appreciate the opportunity to describe the Federal 
Reserve's efforts in this area and I am happy to answer any 
questions.
    [The prepared statement of Mr. Alvarez can be found on page 
36 of the appendix.]
    The Chairman. Our next witness is Meredith Cross, who is 
the Director of the Division of Corporation Finance at the SEC.

     STATEMENT OF MEREDITH B. CROSS, DIRECTOR, DIVISION OF 
  CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION

    Ms. Cross. Good morning, Chairman Frank, Ranking Member 
Bachus, and members of the committee. My name is Meredith 
Cross, and I am the Director of the Division of Corporation 
Finance at the U.S. Securities and Exchange Commission. I am 
pleased to testify on behalf of the Commission today on the 
topic of executive compensation oversight.
    The Commission's role in this important area has 
traditionally been to require timely, comprehensive, and 
accurate disclosure to investors about a company's executive 
compensation practices and procedures. One challenge the 
Commission faces is that compensation practices continually 
evolve and become increasingly complex. The Commission has 
revised its disclosure rules to address these changes, 
including most recently in 2006 and 2009.
    Currently, we are focused on implementing the requirements 
in the Dodd-Frank Act which address an array of compensation 
issues. I will briefly summarize those provisions and our plans 
to implement them.
    Section 951 requires a shareholder advisory say-on-pay vote 
at all companies subject to our proxy rules at least once every 
3 years, and a separate advisory vote on the frequency of say-
on-pay votes at least once every 6 years. This section also 
calls for new merger proxy disclosure about, and a shareholder 
advisory vote on Golden Parachute arrangements. Although no 
rulemaking deadline is specified, the Commission's goal is to 
adopt final rules in time for the 2011 proxy season, since the 
say-on-pay and say-on-frequency advisory votes apply to 
shareholder meetings beginning January 21, 2011.
    Section 957 requires the national securities exchanges to 
amend their rules to prohibit brokers from voting uninstructed 
shares on certain matters including executive compensation. On 
September 9, 2010, the Commission approved changes to the New 
York Stock Exchange rules that implement this mandate, and the 
Commission expects to approve corresponding changes to the 
rules of the other exchanges soon.
    Section 952 requires the Commission to mandate new listing 
standards concerning compensation committee independence and 
compensation consultant conflicts of interest, and to adopt 
related disclosure requirements. These rules generally must be 
prescribed by July 16, 2011, and the Commission anticipates 
proposing these rules soon.
    Sections 953 and 955 direct the Commission to amend our 
rules to require three new disclosures concerning executive 
compensation:
    First, the relationship between executive compensation 
actually paid and the financial performance of the company.
    Second, total annual compensation of the CEO, the median 
total annual compensation of all other employees, and the ratio 
between these amounts.
    And third, whether employees or directors are permitted to 
engage in certain hedging transactions against the downside 
risk of company equity securities.
     Section 954 requires the Commission to adopt rules 
mandating changes to listing standards so that listed companies 
will have to adopt and disclose clawback policies for 
recovering compensation from current and former officers in 
certain circumstances.
    The Act does not specify deadlines for rulemaking under 
Sections 953, 954, or 955, but the Commission's goal is to 
publish proposals by July 2011.
    Finally, Section 956 requires the Commission and other 
Federal regulators to jointly prescribe regulations or 
guidelines applicable to covered financial institutions, 
including, from the SEC's perspective, registered broker-
dealers and investment advisers with assets of a billion 
dollars or more.
    The regulations or guidelines, which must be prescribed no 
later than April 21, 2011, will require disclosure to the 
appropriate Federal regulators of the structures of incentive-
based compensation and prohibit incentive-based payment 
arrangements that the regulators determine encourage 
inappropriate risks.
    We are working with our fellow regulators to develop these 
regulations or guidelines within this timeframe. The SEC's Web 
site has a series of e-mail boxes to which the public can send 
comments before the various Dodd-Frank implementation rules are 
proposed and the official comment begins.
    So far, comments on the executive compensation provisions 
range from those expressing general concern about compensation 
practices, to others providing detailed suggestions for 
implementation of specific provisions of the Act.
    The Commission is committed to ensuring that our disclosure 
rules provide investors the information they need to make 
informed voting and investment decisions and to implementing 
the provisions of the Dodd-Frank Act, addressing compensation 
issues as required by the Act.
    Further, we are committed to working with our fellow 
regulators to prescribe regulations or guidelines for covered 
financial institutions to prohibit incentive-based payment 
arrangements that encourage inappropriate risk, as mandated by 
the Act.
    Thank you again for inviting me to appear before you today. 
I would be happy to answer any questions you may have.
    [The prepared statement of Ms. Cross can be found on page 
60 of the appendix.]
    The Chairman. And finally, Mr. Marc Steckel, who is the 
Associate Director of the Division of Insurance and Research at 
the FDIC.

  STATEMENT OF MARC STECKEL, ASSOCIATE DIRECTOR, DIVISION OF 
 INSURANCE AND RESEARCH, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Steckel. Good morning, Chairman Frank, Ranking Member 
Bachus, and members of the committee. I appreciate the 
opportunity to testify on behalf of the FDIC at this hearing on 
the oversight of executive compensation after passage of the 
Dodd-Frank Act.
    The structure of employee incentive compensation programs 
can affect banks' risk profiles and long-term performance. 
Without question, compensation programs that rewarded short-
term profitability without accounting for risk were one in a 
series of factors that contributed to the recent financial 
crisis.
    As deposit insurer, the FDIC brings a unique perspective to 
the regulation of incentive compensation practices. When a 
bank's compensation programs encourage the poorly managed risk-
taking that precedes many bank failures, the Deposit Insurance 
Fund pays for the consequences of that excess.
    Prior to the passage of the Dodd-Frank Act, the FDIC began 
to increase its efforts to curb the risky compensation 
practices that helped precipitate the financial crisis. As 
early as November 2008, the FDIC and other Federal banking 
agencies issued a statement addressing the need to rein in 
risky compensation practices in an interagency statement on 
meeting the needs of creditworthy borrowers.
    In January of this year, the FDIC issued an advance notice 
of proposed rulemaking to examine whether the FDIC's risk-based 
assessment system should be updated to consider the risks 
presented by poorly designed incentive compensation programs. 
The ANPR solicited public comment on whether the deposit 
insurance assessment system could be used to complement 
supervisory standards--to incentivize banks to use compensation 
programs that are even less risky than those allowed under 
safety and soundness guidance and regulations.
    Using the deposit insurance pricing system in such a way 
would be consistent with existing features of the system, 
which, for example, provides a comparative advantage to banks 
that choose to operate with capital levels greater than those 
mandated by supervisory standards.
    The FDIC has reviewed the comments received in response to 
the ANPR and continues to work with the proposal. While our 
work isn't done yet, I can share that the Federal Deposit 
Insurance Corporation does not seek to limit the amount of 
compensation that employees can earn. Our view is that 
addressing the structure of compensation programs would be a 
more effective approach.
    Moreover, we do not believe that a one-size-fits-all 
approach is the best policy either. Our view is that employee 
incentive compensation programs that are balanced and aligned 
with the long-term interest of all the banks' stakeholders 
present lower risk to the Deposit Insurance Fund.
    Based on the comments received from the public, academics, 
and others, and our own research, FDIC staff has identified 
certain features of incentive compensation programs that we 
believe can help protect the Deposit Insurance Fund.
    First, boards of directors and senior managers of financial 
institutions must take primary responsibility for ensuring 
incentive compensation programs effectively align employees' 
motivations with the long-term interests of the institution.
    Second, portions of employees' incentive compensation 
should be deferred and subject to meaningful lookback 
mechanisms that allow awards to be reduced or rescinded if the 
original justification or the award proves over time to be 
invalid. Employees who have a portion of their incentive 
compensation deferred have less incentive to engage in risky 
behavior and, furthermore, must be concerned with the long-term 
health of their employer to ensure that they will receive the 
award at a later date.
    In early 2010, the FDIC joined the Federal Reserve to 
review compensation practices used by large banking companies. 
Later, in June of this year, the FDIC joined the other Federal 
banking agencies in issuing the interagency Guidance on Sound 
Incentive Compensation Policies.
    Turning to the implementation of the compensation 
provisions of the Dodd-Frank Act, I would note that Section 956 
is the provision that most involves the FDIC. This section will 
strengthen the authority of the FDIC and other regulators over 
incentive compensation practices at covered financial 
institutions.
    The FDIC has begun discussions with other regulators on how 
to implement the requirements of Section 956. The FDIC will 
continue to work with our fellow regulators and continue to 
seek ways to bring our unique perspective and capacity as 
deposit insurer to bear on this important issue.
    I appreciate the opportunity to testify and will be happy 
to answer any of your questions.
    [The prepared statement of Mr. Steckel can be found on page 
70 of the appendix.]
    The Chairman. I thank all of you.
    First of all, let me ask--we did try to work with you-- the 
provisions of the bill that you all work with, my impression is 
that those are generally consistent with the direction you were 
going in on your own.
    Are there any things in the bill that could be a problem 
for you and that need to be fixed? We don't think so, but my 
sense is that we were basically empowering you and encouraging 
you to do what you wanted to do anyway.
    Mr. Alvarez?
    Mr. Alvarez. I agree with you, Mr. Chairman. We think this 
has been very helpful. If there is anything that comes up as we 
get further into this process, we will certainly come talk with 
you.
    The Chairman. Anybody else?
    Ms. Cross. We agree.
    The Chairman. The question, then, is what we are told of 
course, is nice try, but all those smart business people will 
outwit all those bureaucrats and they will come up with some 
new ways. I think we anticipated that by giving you general 
authority not to circumscribe.
    But let me ask you, do you believe--first of all, you have 
obviously begun talking to and have been talking to some of the 
people you variously supervise. What is your sense of their 
approach? My own view is that, frankly, if this is done 
uniformly, a number of companies would welcome it; that is, we 
have control for the competitive advantage, that if everybody 
is under a set of fair rules, they appreciate that because you 
don't have a kind of a competitive effect and the reaction you 
are getting from the various institutions under your 
jurisdiction.
    Mr. Steckel, let's start with you.
    Mr. Steckel. Thank you. We got comments on the Advance 
Notice of Proposed Rulemaking that we issued earlier this year. 
We got over 15,000 responses and most of them--in fact 
predominantly, they were in favor of us pursuing some approach. 
The minority of the comments we got were not supportive, and a 
lot of those were sort of on technical matters, and there were 
a few that were just philosophically opposed to the government 
having any role in compensation.
    The Chairman. Of course the FDIC had moved--the Federal 
Reserve, before we acted, but I take it the statute is in 
general consult with the direction were you moving in.
    Mr. Steckel. That is right. I think the statute is 
supportive of the approach that we were pursuing.
    The Chairman. Let me ask you the final question I have, 
which is the argument, yes, but all those smart people in the 
financial institutions will outsmart all you stodgy bureaucrats 
and all of us benighted politicians and find ways around all 
this.
    A two-part question. Is there any indication that they are 
trying to do that? And if there is, do we need to give you more 
authority in case they do? Let's start with Mr. Alvarez.
    Mr. Alvarez. I think one of the things that is helpful here 
is that the banking institutions at least understand the 
problem as well and accept the problem as well. So we don't 
sense the motivation to get around what we are trying to do. We 
find the institutions are really embracing the opportunity to 
limit risk in incentive compensation.
    I think your first two points, though, were very key to 
this; we are not trying to limit the level of compensation. We 
are not putting caps on salaries, so there is less incentive to 
try to get around that. We are trying to align incentives and 
aligning incentives is what the industry wants to do as well. 
And also by having this broadly based across all banking and 
financial firms, we remove the disincentive. I think firms were 
very worried that if they were the first one to move, the first 
one to limit this compensation, they would lose the best 
people, and we are taking that away.
    The Chairman. I think that was one of the things we had in 
mind, which is as you were doing this through your various 
agencies, unless you could have all done it in total lockstep, 
which is hard to do, there would have been a complaint about 
institutional advantage versus another.
    Ms. Cross?
    Ms. Cross. I would first note this will be a new role for 
the SEC as it relates to the broker-dealer and investment 
adviser compensation oversight. So my fellow regulators have a 
head start, but we are learning from them and working with them 
to get there. I think there are a few points worth noting that 
should make this successful. I think first off is that it is a 
principle-based approach as opposed to caps and so it is hard 
to find--avoid a principle, the principle being that you are 
not supposed to structure your compensation to create 
inappropriate risks.
    Another aspect that I think makes this successful is that 
the compensation committee is responsible for oversight of 
compensation, at least as to higher paid executives, and they 
are subject to fiduciary duties and they will be accountable; 
and there will be the say-on-pay vote so there are enough 
different pieces of this to make it have a lot of sunshine and 
a lot of shareholder input.
    And then lastly we have--the SEC adopted disclosure 
requirements last year that would require disclosure if you 
have risks that expose you--have compensation programs that 
expose you to inappropriate risks. So I think that combination 
of factors suits us well and it should be successful.
    The Chairman. Thank you. Mr. Steckel, do you have anything 
you want to add?
    Mr. Steckel. Yes, I do. There are two points, I think. The 
FDIC has pursued a lot of thinking around the idea of deferral. 
Large bonuses can be awarded and in many cases are earned and 
deserved. We don't have an argument about that, but in some 
cases they have been paid out but later the risks that were 
assumed blow up and cause problems for an awful lot of people 
and sometimes the public interest. We think meaningful lookback 
mechanisms are an important part of this.
    Also we have explored the topic of aligning employees' 
interests, incenting employees to consider all of the banks' 
stakeholders. We think current practice currently aligns 
employees' interest with those of shareholders pretty well, 
probably to the detriment of some other stakeholders.
    The Chairman. Thank you.
    Not as a question, but as to procedure, we are going to be 
going to the second panel, which includes Mr. Baily who is, 
again, a representative of the Squam Lake Group. So I would 
hope that either you or some of your staff could stay behind. 
We thought that was a very thoughtful, bipartisan cross-
Administration approach, and we hope you would able to listen 
to what they say and work with them as well.
    Mr. Bachus?
    Mr. Bachus. Thank you, Chairman Frank. In my opening 
statement I mentioned entertainers and athletes. But the 
distinction that I would argue and I think is correct is 
athletes and entertainers don't lose billions of dollars of the 
assets of their corporations, and therefore there is no 
negative impact on the shareholders and on the broader economy. 
And certainly in the run-up to the Wall Street crash, we had 
numerous instances of traders or employees who took what I 
would call bad-tail risk, what you all--if that is the proper 
word for it--which actually resulted in insolvency for those 
institutions, to the shareholders, and taxpayers and the 
general economy suffered. So there are obviously--I think to 
address this and financial reform was the proper thing, and I 
want to make that clear.
    Incentive compensation packages, I think all Republicans 
would agree with our members in the majority, a need to be 
consistent with safety and soundness practices, particularly if 
you have a Federal backstop or Federal safety net.
    As we found with systemic risk, our large corporations I 
think it is essential, because of the interconnectivity of the 
economy, as we have all learned.
    I do think with bad-tail risk, that is something I would 
assume you are all going to focus on, because we found out that 
really one employee, or one or two employees can bring down the 
largest insurance company in America. I think bad-tail risk, 
you have defined it, or the regulators or the industry, as a 
low probability of occurring, but if it does occur, a very high 
risk of threatening the insolvency of the institution. So I 
would say that is something that you really need to focus on.
    I don't know with smaller companies where there is not a 
Federal backstop, not a systemic risk if the role is not a 
little bit different. But let me say this; your testimony was 
very thoughtful, every one of you.
    Let me conclude with a question. I usually ask questions. 
That was a statement. But I do want to make it clear to 
Chairman Frank and to the public that there is widespread 
consensus not only among the public, but I think within the 
financial industry and within the Federal regulators and all of 
us, that compensation practices can threaten the safety and 
soundness of institutions and that there has to be some 
governance and oversight of that.
    My question is, Nell Minow testified last year and she 
said, ``I have a low confidence in politicians and 
bureaucrats.'' So she actually addressed us in the least 
favorable terms, but I will change that to Members of Congress 
and government officials, that she has very little confidence 
in them being able to review incentive compensation plans at 
financial institutions not to micromanage. She's afraid, and I 
think that is a fear we all have, that there will be too much 
micromanagement. How will your agency embark on this joint 
rulemaking and supervision without micromanaging compensation?
    I will just ask, do you see that as a problem or could it 
be a problem?
    Mr. Alvarez. So the approach that we have taken is, first, 
we are not trying to set the level of salary of individual 
employees, we agree we are not good at that; that is up to the 
corporation to deal with itself. So we have been focusing on 
structure and process. We are making sure the board of 
directors is involved in the decision-making. We are making 
sure that the management can explain why it awards bonuses in 
one situation and not in other situations.
    We think that in order to deal with things like tail risk, 
the corporation should take into account deferral practices and 
clawback practices and a variety of other practices that are 
being developed by the industry, by academics, by HR 
professionals, risk management professionals, and bringing that 
to bear so the risks that come about from incentive 
compensation are not unintended and don't encourage greater 
risk to the organization.
    So we are not about micromanaging the actual pay for 
individuals. We are about making sure the incentive structure 
and process leads to a good result.
    Mr. Bachus. And if I could get the other two to answer?
    Ms. Cross. Although we are at the beginning of this, from 
the SEC's perspective, we have the same approach in mind. And I 
don't think we have any interest in micromanaging the pay. We 
want to make sure we do what Congress directed us to do, which 
is to work with our fellow regulators to come up with standards 
that should decrease the risk of incentives that are dangerous.
    Mr. Bachus. Okay, thank you.
    Mr. Steckel. The FDIC has taken a fairly slow approach to 
this, because as you study this and you try to do good policy, 
it does become apparent that it is difficult and we want to 
avoid unintended consequences. I agree with the others in that 
we do not want to micromanage. We will not be setting pay 
levels. But I think conceptually we do have an interest in the 
structure of compensation and that large discretionary awards 
in many cases should at least in part be deferred to see if the 
tail risk does come up and cause a problem later.
    We have spent a lot of time talking to industry 
professionals over the past year to help us form our views, and 
we are familiar with the work of the Squam Lake Group which has 
influenced our thinking somewhat.
    Mr. Bachus. Thank you very much. I appreciate it. I think 
your written testimony is going to be very helpful to us and I 
think, too, to the industry and to the public.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. I think I will pass. I 
was hoping to try to get to hear the second panel's testimony 
before I left, so I am going to try to expedite that. This 
testimony is very clear. So, Mr. Chairman, I am passing.
    The Chairman. The gentleman from Florida, I guess, was here 
first by Republican rules.
    Mr. Posey. Thank you, Mr. Chairman.
    The Chairman. We will get to you.
    Mr. Posey. I kind of want to echo the comments made by the 
gentleman from Alabama. Your intent and your advice is 
thoughtful and well-intended and I hope will be very effective. 
But if we tend ever to use a cannon to kill a sparrow, it 
causes a little bit more collateral damage than we intend 
sometimes. And I just want to express that I think the more 
complex you make the regulations, as the chairman said, the 
more wiggle room you are going to have and the more plans to 
circumvent it or take away the intent of what you are doing.
    I think probably the absolute best accountability that we 
can have is the absolute best possible transparency, and I am 
not sure how all the compensation was arrived at. I am sure 
much of it was made in contractual deals downstream that said, 
if you do this you are going to get this. And so it may not 
have been decisions made after the fact at all, and may not in 
the future be made after the fact. It may be a predetermined 
set of guidelines that you may or may not have any control 
over.
    I think with the transparency goes responsibility to have 
strict enforcement and prompt prosecution for violations. As we 
know, at the SEC we don't have a long history of that. And the 
FDIC activities that I have seen most recently in my district 
with the bank regulators gives me less confidence than ever in 
that agency. I think they are--just as I mentioned in some 
discussion yesterday-- going off in a wrong direction out of 
fear or self-protection or whatever.
    But I would appreciate during whatever time is left if you 
could explain briefly the difference between a typical--and I 
don't mean everyone would fit in that category--but a typical 
executive compensation and the relationship between the 
compensation committee and the chairman, or whoever they are 
compensating, and the difference between that relationship in 
the future as you foresee it under your guidelines.
    Thank you, Mr. Chairman.
    The Chairman. Was there a need for comment?
    Mr. Posey. I would like a comment briefly from each of 
them, if you don't mind.
    The Chairman. I am sorry, go ahead.
    Mr. Steckel. The FDIC, as a policy goal, I think our focus 
is on material risk-takers. We are not interested in targeting 
many, many bank employees who may get small referral bonuses or 
small end-of-year performance bonuses that in no way could 
influence them to affect the overall health of an institution. 
But some higher paid employees can take those sorts of risks 
and can get paid an awful lot of money for that. I think we 
would tend to focus on those employees. There is really not a 
problem to fix with lower paid employees, I don't think.
    Ms. Cross. I will mention a couple points. Under the Act, 
there will now be a requirement for listed companies that the 
compensation committee be comprised solely of independent 
directors, and there will be enhanced disclosures about 
compensation committee independence. So I think that might get 
at part of your concern.
    On the who will do this work and what is their relationship 
to the people that they are overseeing, boards of directors in 
general are responsible for risk oversight at companies. 
Sometimes they delegate that to a committee like a risk 
committee.
    At companies these days, what has been happening is the 
compensation committee stays responsible for the executive 
compensation and so including, for example, the CEO pay, and 
there would be the requirement for independence in the future. 
And then the risk oversight would be from the board overall and 
that would be for the broader employee programs.
    So I think there will be several different checks and 
balances within the board, and particularly strengthened by 
what you did in the Act.
    Mr. Alvarez. I agree with the previous two about the 
involvement of the board of directors, and independent 
compensation committee in particular, in reviewing the CEO 
salary as you raised.
    The point I would add is that for the most senior 
executives, I think we place particular emphasis on deferral of 
incentive compensation awards with adjustment of those awards 
as the risks mature and show up in an organization, so that 
CEOs in particular have their incentive compensation adjusted 
for the health of the company and the risks that show up in the 
company in the future. Not all risks show up immediately, so 
they need some time for those to mature and we would like those 
to be reflected in the incentive compensation award.
    Mr. Posey. Can I ask a follow-up question, Mr. Chairman? 
Thank you.
    But suppose that I am the person in charge of hiring a CEO 
for my big bank, and I go to you and I say, look, I am going to 
pay you the average salary, $800,000 a year, and I am going to 
pay you a bonus based on, hypothetically, let's say 1 percent 
of the net profits. And he performs. I got what I wanted, he 
gets what he wanted; it will be $4 trillion under those 
circumstances. But he wrecked us in the meantime. What are you 
going to do?
    Mr. Alvarez. The expectation is that the incentive 
compensation award would have a way of reducing--deferring that 
payment. So that 1 percent that you spoke of, the bonus 
wouldn't be paid immediately; it would be deferred over some 
period of time to allow the company to realize whether it has 
been wrecked. And if losses do indeed show up, then that award 
would be reduced. And what that does is, that removes the 
incentive for the CEO to take big risks immediately because 
they know those will show up in a reduction in their incentive 
compensation at a future time.
    Mr. Posey. I think that would be--one more question, since 
we don't have very many people.
    The Chairman. We are already 2 minutes over.
    Mr. Posey. Okay.
    The Chairman. The gentleman from Texas, thanks to the 
generosity of the gentleman from Kansas.
    Mr. Green. Thank you, Mr. Chairman. Again, I thank you and 
the witness as well. I would like to just briefly explain why 
in my opinion it is very important to talk about the amount of 
the compensation. If we don't talk about the amount--and I am 
not begging the witnesses to do so--but it is important for us 
to do so. If we don't talk about the amount of the 
compensation, we don't really get an understanding as to why 
people would assume the types of risks that they assume, why 
they have this incentive to do these things.
    And systemic risk is not created by persons who make 
minimum wage, not created by persons who are making $50,000, 
$60,000, or $70,000 a year, generally speaking. This systemic 
risk is created by persons who make hundreds of dollars per 
second. I mentioned the CEO who made $534 per second, which in 
about 28 seconds allows him to make what a minimum worker makes 
all year. This is the kind of compensation what we are talking 
about.
    And I applaud the bill, I applaud Chairman Frank, and 
Chairman Dodd. I applaud you for indicating that we are not 
going to micromanage the pay of individuals; that is not what 
it is about. It is about making sure that the pay doesn't 
produce systemic risk, that is what it is about. But people in 
the American public have to understand what the pay is, so that 
they can see why people assume this type of risk and why they 
will do these kinds of things. It is huge. The amounts of money 
are escalating, they are not deescalating. The amount of 
executive compensation has been consistently going up, while 
creating this gap between low-income workers and maximum-income 
earners. We are doing the right thing by putting into place 
regulations that will curtail the taking of systemic risk, 
which, in my opinion, helped to create the crisis that we had 
to contend with.
    And finally I will say this, as I am about to make my exit. 
I have spoken longer than I actually intended to, but I do want 
to say something about the athletes, if I may, and whether they 
bring down a team. If they don't perform, the tickets don't 
sell. If the tickets don't sell, the stockholders do lose 
money. But that is besides the point.
    The point that I really would make in terms of making a 
distinction between the athletes and some of these persons who 
make $500 a second is that the athletes pay ordinary income 
taxes, the hedge fund manager pays capital gains tax, 15 
percent ordinary income; it could be 36 to 40 percent depending 
on how you count it.
    But it is not about athletes, it is about systemic risk, 
and it is about the inordinate amounts of moneys that I salute 
people for making because they have a talent to make, but that 
in some way can create liability for others when systemic risk 
is produced.
    Mr. Chairman, I thank you and I yield back the balance of 
my time.
    The Chairman. The gentleman from New Jersey.
    Mr. Lance. Thank you, Mr. Chairman.
    Good morning to you all. I think this is a very important 
discussion. The bill states regarding incentive-based 
compensation that the regulation community will decide what is 
inappropriate.
    Could each of you briefly give me your thoughts as to where 
you might be headed, as to what you might consider to be 
inappropriate. And I know it is a very broad question, but your 
initial thoughts as to that.
    Mr. Steckel. I think one thing that comes to mind is an 
exorbitantly large guaranteed bonus that gets paid regardless 
of the performance of the institution.
    Mr. Lance. And would you likely place an amount as to what 
is exorbitantly large?
    Mr. Steckel. No, I don't think we are prepared to do that, 
and I am reluctant to.
    Mr. Lance. So ``inappropriate'' would be translated as 
exorbitantly large.
    Mr. Steckel. I think we need to have some policy 
discussion.
    Mr. Lance. Yes. Ms. Cross?
    Ms. Cross. I would describe it in a more principle-based 
fashion as pay where the risks to the institution outweigh the 
rewards to the institution. So you would need to consider, 
looking at the type of pay structure, whether it has that 
impact. And if it does, it is inappropriate. You shouldn't be 
paying people more to expose the company to more risk than the 
company would be rewarded if it worked out well.
    Mr. Lance. Thank you. Mr. Alvarez?
    Mr. Alvarez. I agree with Ms. Cross. It is very nuanced, 
there is no number, there is no automatic piece. It is about 
the risk that is incented by the compensation and whether that 
is something the company can handle.
    Mr. Lance. Thank you. I am sure we will be reviewing it 
with you as the process continues. Shareholders, of course, 
will have the right on say-on-pay. I think the bill may be 
somewhat ambiguous as to whether it should be an advisory or 
binding vote.
    Does the panel have a position on that? I think that is 
particularly directed at Ms. Cross.
    Ms. Cross. I am happy to address that. I think the bill is 
actually clear that it is nonbinding as it relates to both say-
on-pay and say-on-frequency.
    Mr. Lance. Yes.
    Ms. Cross. There is some ambiguity as to whether the 
frequency vote is nonbinding, but our view is, reading the 
entire provision, that the part at the end that says it is a 
nonbinding vote applies to the whole Section, so--
    The Chairman. If the gentleman would yield, that is 
certainly our intent, and if ever they felt we needed to 
clarify it, we would I am sure be able to do that quickly. But 
the intent was and, I think, in fact it is nonbinding.
    Mr. Lance. Thank you. That is clarifying. And I am pleased 
that the SEC is of that opinion, and I certainly defer to the 
Chair. Thank you, Mr. Chairman. I yield back the balance of my 
time.
    The Chairman. Let me say, by the way, if I can have a 
minute of unanimous consent. One reason that has to be 
nonbinding is that if it was binding, you couldn't pay them 
anything. It is just a practical thing. And the English 
experience which we have looked to is that nonbinding is pretty 
influential.
    The gentleman from Kansas. And I appreciate his deferring 
to our colleague from Texas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. One of the 
major concerns that continues to be raised by my friends across 
the aisle and the business community is a lack of certainty 
when it comes to the new rules businesses face. But given the 
near collapse of our financial system, I don't know how anyone 
can responsibly argue that a complete overhaul of our financial 
rules, as we did with the Dodd-Frank Act, was not warranted. 
And while businesses want certainty, they also want well-
thought-out rules that are not hastily written, creating 
unintended consequences.
    Given this strain between speed and quality rulemaking, 
what steps are your agencies taking to implement the new rules 
quickly, while also performing due diligence to improve 
executive compensation rulemaking?
    Mr. Alvarez. The banking agencies have already issued 
guidance. We sought public comment from the industry and from 
consumer advocates and others about the policies. And we have 
already begun, actually, our horizontal review or examination 
of the practices at large organizations, which involves a 
dialogue with them about how best to improve their systems, the 
philosophy they bring to incentive compensation, and then the 
principles that we are trying to get them to adopt.
    Mr. Moore of Kansas. Thank you. Ms. Cross?
    Ms. Cross. With regard to the SEC's rulemaking initiatives, 
both for the executive compensation matters and all the other 
matters under Dodd-Frank where we have rulemaking, we set up 
public e-mail boxes where people can send in their comments 
even before we start with public rulemaking, so that we are 
able to take those into account as we get the rules ready for 
the public; and then, as always, will benefit from the public 
comment that comes in.
    We are also meeting with many interest groups and posting 
the agendas from those meetings on the Web site so the people 
can see the topics that are under consideration. We agree it is 
very important that we have all the due diligence we can have 
so that these rules work well.
    Mr. Moore of Kansas. Thank you. Any comments, Mr. Steckel?
    Mr. Steckel. Yes. Chairman Bair has made this issue a 
priority, before and after passage of Dodd-Frank. We think 
Dodd-Frank helps us to our end and we are going to continue to 
pursue this vigorously.
    Mr. Moore of Kansas. Thank you. And I have one more 
question. We have all focused on what went wrong in the 
financial crisis and I think it is very appropriate, but I 
think it is equally as important to learn from the responsible 
actors and build on their successes.
    So last month the oversight committee I chair held a field 
hearing in Kansas to learn from responsible Midwest banks and 
credit unions who were not the cause of the financial crisis.
    And my question is, with respect to the new executive 
compensation rules that your agencies are drafting and 
implementing, what will it mean for community banks and credit 
unions? And in the rulemaking, are you avoiding one-size-fits-
all approaches that may unfairly discriminate against smaller 
firms?
    Mr. Alvarez. Sir, we have been quite clear in our guidance 
that we expect the types of adjustments on incentive 
compensation to vary based on the complexity, size, and use of 
incentive compensation by firms. So smaller banking 
organizations tend to not use incentive compensation very much, 
and they also have short, flatter organizations, much easier to 
police, and understand the risks that are associated with 
incentive compensation. So we haven't seen a problem coming up 
with smaller organizations. So our guidance makes allowance for 
that.
    Mr. Moore of Kansas. Thank you.
    Ms. Cross?
    Ms. Cross. I will cover your question as it relates to the 
other executive compensation rulemakings since the banks are 
really for my fellow regulators.
    There are numerous provisions in the Dodd-Frank Act that 
tell us to consider the impact on small business as we 
implement the rules, and we will carefully, carefully do so and 
request comment so that we can calibrate the rules 
appropriately, so that we don't unduly burden small business.
    Mr. Moore of Kansas. Thank you.
    Mr. Steckel?
    Mr. Steckel. Yes. I think you are right. There are an awful 
lot of small banks that use limited, if any, amounts of 
incentive compensation as part of their business model, and we 
will specifically not target them. I don't think they are the 
problem that we are trying to address here.
    Mr. Moore of Kansas. Thank you very much to the witnesses.
    Mr. Chairman, my time is nearly up. I yield back.
    The Chairman. The gentleman from North Carolina.
    Mr. McHenry. Thank you, Mr. Chairman.
    I certainly appreciate your testimony. I wasn't here for 
your verbal testimony, but I have read your testimony.
    How do you plan to deal with multinationals? Section 953 
has been cited by some as a logistical nightmare. How do you 
intend to deal with an individual's compensation to the overall 
firm's earnings and income that is not simply a domestic bank 
but a multinational?
    Ms. Cross. I think that one is for me. We are just 
beginning the rulemaking process, and we expect to propose the 
rules under 953 next summer. It doesn't have the same deadline, 
so we will have the opportunity as we prepare the rules to get 
input from everyone about how we should address those concerns.
    We have heard that there are worries about the logistics of 
figuring out the pay in a multinational firm. So we are looking 
through those provisions now, working with all the interested 
parties, and we will put together a rule proposal we think can 
best implement it in a way that is workable.
    Mr. McHenry. Okay. So, generally speaking, you are going to 
do what you normally do, which is you are going to input and 
make a rule; that is basically what you are telling me?
    Ms. Cross. The Act directs us to adopt a rule to implement 
that provision. So we are doing what we are tasked to do under 
the Act.
    If we run into problems, we will let you know, and we will 
come back if it is something that isn't workable, but we would 
first like to try to see if the rule can be implemented in a 
way that results in implementing what we have been tasked to do 
in a way that is workable.
    Mr. McHenry. Okay. Yes.
    Mr. Alvarez. One thing I would add, in the banking area, 
there is an awareness worldwide that incentive compensation 
practices need to change, and we have been working with some of 
our foreign counterparts, especially through the Financial 
Stability Board, to develop standards that are being used on an 
international basis. Our guidance is very much in tune with the 
international direction of the FSB. So we are actually 
heartened that the other parts of the world are seeing the 
importance of all of us moving down this road together.
    Mr. McHenry. How important do you think that is with 
basically foreign standards that are similar to ours?
    Mr. Alvarez. I think it is very important because of the 
incentives that are created. We don't want to lose our best 
talent to foreign competitors or have businesses move offshore 
in order to avoid incentive compensation rules. So it is 
important that this be an international work.
    Mr. McHenry. Certainly.
    Now, Ms. Cross, you mentioned to my colleague from New 
Jersey that weighing the balance of pay, an individual's pay, 
whether that--the potential gain outweighs the systemic risk, 
that is basically what you are--similar to what you said; isn't 
that right?
    Ms. Cross. That is right.
    Mr. McHenry. Isn't that in many respects in the eye of the 
beholder?
    Ms. Cross. Again, I think that I would like to emphasize 
that we don't envision micromanaging the pay of any particular 
individual. It is much more of a structural question. So, as 
you develop guidelines or regulations that set forth standards 
for how the pay is to be structured, limitations really on the 
structure of pay that would present those risks, as in the 
guidance that has already been issued, you would look in terms 
of, what risk does it pose for the company, and are they 
appropriately calibrated? Yes, it is in the eye of the 
beholder, but the compensation experts have significant input 
and have, I think, reflected in the guidance that you can 
calibrate it to appropriately reflect risk.
    Mr. McHenry. So, therefore, a trader and a CEO can have 
different rules?
    Ms. Cross. I think that is right. I think there would be 
different structures that would be appropriate for a trader 
versus a CEO.
    Mr. McHenry. Okay. But even in the case of some similar 
failed institutions that the Federal Government has a 
significant ownership interest in currently, in different 
sections, different divisions of the company, you have people 
compensated in very similar ways. One lost billions of dollars 
for the institution; the other made hundreds of billions of 
dollars for the institution. So even with basically the same 
incentive packages, you are going to have widely variant 
outcomes and widely different systemic risk based on the nature 
of their business; is that fair to say?
    Ms. Cross. I think that has historically been the case. And 
I don't want to speak for the folks who have already done this, 
but the horizontal review they have been going through to find 
out what are the compensation practices throughout these 
organizations should help us as regulators develop guidelines 
that would be appropriate so that is more appropriately 
calibrated throughout the organizations.
    The Chairman. If the gentleman would yield, I would 
acknowledge when I called this hearing I was thinking frankly 
about the provisions that we initiated, which was the say-on-
pay and executive piece. The Senate added that other piece, and 
I share some of the questions about that. I think it was 
imprecisely worded. It is not clear.
    It seems to me if you look at the wording literally, an 
inappropriately large number of people are involved in the 
comparison, and obviously if that can be worked out, okay. But 
we are very much open to try to fix that legislatively because 
that was the Senate piece, and you are right. It is 
appropriately on the table.
    Mr. McHenry. And let's understand that truly the debate is 
not between Democrats and Republicans. The true enemy is the 
Senate.
    The Chairman. In this case, there is the House-Senate 
difference.
    Mr. Bachus. Could you further yield? And I appreciated 
those questions. I thought they were insightful.
    One of the things that I know in the written testimony that 
you address, similar to that last question, is that 
compensation doesn't vest immediately, and therefore, although 
a trade may have a short-term positive, it may be a long-term 
disaster. And we talked about the bad-tail risk, and even if 
you have one trader who makes a half billion dollars, you have 
another trader who gets wiped out for $2 billion--which we have 
seen, a very large amount. So the fact that one could make and 
one could lose, if the one that loses bankrupts a corporation, 
that is a serious risk.
    But the other thing is, that often you can maximize short-
term profits at the sacrifice of long-term profits.
    The Chairman. If the gentleman would yield. I think we all 
agree that is why we haven't tried to be too rigid but have 
given discretion to the regulators, precisely on that 
compensation.
    The gentleman from Minnesota.
    Mr. Ellison. Thank you, Mr. Chairman, and thanks for 
pulling this hearing together. I only have a few questions.
    My first question is, in light of the passage of the Frank-
Dodd bill, the provisions on compensation, have you seen 
adjustments within the industry? Have you witnessed any sort of 
a self-correcting conduct that would sort of align compensation 
with proper incentives for the company?
    Mr. Alvarez. We have been doing a horizontal review where 
we are actually looking at the practices, and we are finding 
that institutions are taking steps on their own. They have 
identified some of the very same problems that we had 
identified in the guidance. They want very much to remove 
incentives to folks to increase risk behind the backs, as it 
were, of the control systems these organizations have put 
together. So we are finding good cooperation. There are still a 
lot of uncertainties. There is still a lot of work that needs 
to be done.
    One of the things, for example, that is difficult is 
getting good metrics for risk. Some areas are easier to 
identify risks than others. You may be able to identify, for 
example, mortgage loans and the loss rates on mortgages, but it 
is not always easy to identify if a certain strategic move is 
going to work out. So it takes some time for those things to 
develop.
    So we continue to work with organizations to find good 
metrics and to use judgment that is well informed when there 
are not good metrics, but as a general matter, we think the 
institutions are willing and interested in making change.
    Ms. Cross. I would note that the concept of finding out 
whether pay creates inappropriate risk is a relatively new idea 
that people are just learning about, and so, for example, 
particularly at the nonbanks, the sort of rank-and-file public 
companies, they are in the process now of doing inventories of 
their incentive programs and figuring out, do these create 
inappropriate risks for the companies? And it has been a very 
good exercise I think for boards to hear what kind of programs 
there are and what kind of risks they may pose, and then the 
companies over time can revise those programs. So I think this 
is not just at the financial institutions. I think it is 
throughout our capital markets, which is a very healthy thing.
    Mr. Steckel. I would add that we see banks paying a lot 
more attention to this recently than say a few years ago. Both 
the passage of Dodd-Frank and also a lot of bad press that was 
out there about these companies pushed them in that direction. 
We also think that the rulemaking that is required under Dodd-
Frank is also necessary to make sure we don't, over time, 
backslide to some of the bad practices that occurred years ago.
    Mr. Ellison. Can you all report on what you are seeing 
about these rules and the legislation and the application of 
the rules that are being promulgated on people who work below 
the top executive level? So many decisions are not made at the 
top executive level, and I think it is important we pay 
attention to those incentives as well.
    Just a very quick story. I met with a group of people who 
worked in a bank, and they were told they couldn't hand back 
over overdraft fees that they were urged to push people to open 
up new accounts, and these are people on the bank level working 
with customers. Their incentives were to have people open up 
more accounts so they would generate more fees, have, you 
know--not push back overdraft stuff, and there is just a lot of 
pressure on these line employees. I don't think this will 
work--do you see that this bill could affect the way they are 
compensated? Do you see it traveling down that far?
    Mr. Alvarez. Our guidance specifically provides that it 
must. We don't deal just with senior executives. We deal with 
any employee or group of employees who can increase materially 
the risk to the organization.
    And what we had in mind, another example, are mortgage 
originators. Mortgage originators may not make very much money 
themselves individually. On the other hand, it is important 
that a firm understand the incentives it creates when it gives 
bonuses to those folks. Is it encouraging them to just increase 
volume without regard to risk or increase the volume without 
regard to compliance with the law? There are lots of things 
incentive compensation practices in the mid-2000's did that I 
think we all regret now.
    So one of the things we have been trying to do--and this is 
an area where I think there needs to be a little more work by 
banking organizations--is to identify those groups who are 
lower paid employees but who do receive incentive compensation 
and do, as a group, add risk to the organization.
    Mr. Ellison. Are you in a position to hear from some of 
those employees? Because I can tell you that some of them are a 
little nervous about talking to me. I had to promise not to 
identify their company. They told me about a lot of pressure 
tactics they were under. Is this something you have been able 
to do is to hear directly from them?
    Mr. Alvarez. We do hear directly from some employees 
through a variety of ways. We also are getting the actual 
incentive compensation policies that apply to them so we have a 
chance to look at the actual document.
    The Chairman. If the gentleman will yield, that is a very 
important point. We will work with our colleague to make sure 
that we have channels whereby that kind of information can be 
sent along in a way that would protect the individuals. We will 
work with you. The time has expired. I thank the panel. This 
has been useful. We have a work in progress here.
    I will say there are some of these things initiated in the 
House, some in the Senate. My own view, as was indicated by the 
questions from my colleague from North Carolina, is that the 
House pieces were somewhat better organized than the Senate 
piece and that more work will have to be done on that, and we 
will be working with you on it. We don't rule out the 
possibility that it will have to be further amended.
    I thank the panel.
    I now call up Martin Baily and Darla Stuckey. Thank you.
    And we will begin with the testimony from Martin Baily, who 
is a senior fellow at the Brookings Institution, and was part 
of the Squam Lake bipartisan group of economists who had 
significant government service who met to discuss this, and Mr. 
Baily is a former chairman of the Council of Economic Advisers.
    Would someone please close the door, as you will never know 
who will wander in here?
    Mr. Baily?

 STATEMENT OF MARTIN NEIL BAILY, SENIOR FELLOW, THE BROOKINGS 
                          INSTITUTION

    Mr. Baily. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee. It is a great privilege 
to be here.
    In a sense, I guess, I am representing the Squam Lake 
group. I do want to mention that I think they see themselves 
primarily as a group of finance academics. There are a few of 
us who have served in government. I was in the Clinton 
Administration, as you mentioned. Fred Mishkin was at the 
Federal Reserve. Matt Slaughter was in the Bush Administration. 
But most of the group are actually finance academics, and they 
got together in an attempt to see if there is anything from 
finance theory and practice that could contribute to financial 
sector reform.
    It is also, as you said, a range of views. Sometimes, we 
have had to be sort of dragged together to form a consensus, 
and I do want to say one or two of the things that I will say 
today may not represent the views of the whole group.
    Let me get started then. I think the Dodd-Frank Act made 
substantial steps forward towards improving regulations but, 
obviously, left a fair amount to be done by the regulators. So 
I think it is very appropriate. I applaud you for holding 
meetings such as this.
    Some of this, as was mentioned earlier, has to be done at 
the international level, and historically, the international 
level hasn't been a great forum. The Basel process has not been 
either timely or effective. There is some sense, I think, that 
the financial crisis lit a fire under them, and they are doing 
a better job now, but that is something certainly we have to 
monitor.
    Now, the two recommendations from the Squam Lake group that 
relate to compensation are, first, to discourage any regulation 
of the level of the compensation, and we have had already quite 
a bit of discussion of that, and that is in line with the Dodd-
Frank Act. So I don't know I need to say a lot about it.
    I think if I were to make one comment it is that we do 
indeed have a very wide and widening income distribution in our 
economy, but it is a much more fundamental problem than just 
the financial sector. It has to do with, are we providing the 
right skills to people; do we have the right tax system, and so 
on. So I don't think that was a matter for financial 
regulation. I agree with you, the decision you have made about 
the level.
    Our recommendation is that the regulators should look at 
the structure of compensation to make sure that it is aligned 
with the interests, not only of shareholders in the institution 
but also of taxpayers who may get called upon to bail out this 
institution, and I know we have put in place various steps so 
that we should not have to bail out financial institutions, but 
we don't know what is going to happen in the future, and I 
think it is an important tool in the arsenal to make sure that 
we have the right compensation structure to reduce that 
possibility.
    We want to make sure that when executives are making 
decisions about the risks they are taking in their own 
institutions, they are not sort of in the back of their minds 
thinking, if things go wrong, I can get supported by the 
taxpayer, either in the form of the FDIC or somewhat in the way 
that happened, unfortunately, in the crisis.
    A major goal of capital market reform should be to force 
financial firms to bear the full cost of their own actions, and 
as I said, we propose several mechanisms and there are such in 
the Dodd-Frank Act to do that, but compensation is a useful 
tool.
    Systemically important financial institutions should 
withhold a significant share of each senior manager's total 
annual compensation for several years. The withheld 
compensation should not take the form of stock or stock 
options. Rather, each holdback should be for a fixed dollar 
amount, and employees would forfeit their holdbacks if the 
government goes bankrupt--excuse me, if the firm goes bankrupt 
or receives extraordinary government assistance. So we want to 
make a very direct link between taxpayer interest and incentive 
on the senior managers of the company. We want to hold them 
accountable for the possible failure of their company.
    Now, I talk in my written testimony a little bit about what 
is currently in the Dodd-Frank Act versus our proposal. I talk 
a little bit about what regulators are doing. We have heard 
about that already here. I talk a little bit about what has 
been proposed in the U.K. financial services authority because, 
as was noted earlier, it is a good idea to have harmonization, 
and obviously, London is the other main financial center. This 
should be more broad than London, but that is obviously the 
biggest alternative to New York as a financial sector.
    So let me just draw my conclusions. I am running out of 
time already. Here I will express my one concern about whether 
the Squam Lake--
    The Chairman. We understand. Take another couple of 
minutes. We have only a few people. So take another couple of 
minutes.
    Mr. Baily. You shouldn't encourage me to blab on, but I 
will finish quickly.
    My only concern with the Squam Lake recommendation is 
whether or not it goes quite far enough, deep enough down the 
organization. If you have a large organization and an 
international organization and you are a trader and you see the 
benefits to you in terms of your bonus of taking on certain 
kinds of risks, I think the notion of worrying about taxpayers 
or if the firm might actually go broke and have to be put in 
receivership with the FDIC or something, that may seem a little 
bit too remote.
    So the way in which I myself would go a bit further--and it 
is along the lines of the testimony that was given earlier--is 
that each company should work with its regulator, the Federal 
Reserve or the FDIC or the SEC, to describe what their 
compensation structure is, how it lines up with their own 
internal risk management structure, and that they are, in fact, 
providing the right holdbacks for traders and for other folks 
within the company to make sure that we don't go to the edge of 
the precipice; in other words, that we build in incentives for 
traders that might take big, risky bets but that wouldn't 
necessarily drive the company into bankruptcy but would pose 
additional risks on the system.
    But I do stress that not everyone at Squam Lake agrees with 
that. There was a good bit of concern among members of the 
Squam Lake group that we don't want to overregulate this. And I 
agree with that. We want to maintain incentives for 
performance, for innovation, all the things which help this be 
a dynamic sector.
    I will stop there. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Baily can be found on page 
49 of the appendix.]
    The Chairman. Thank you.
    Next is Darla Stuckey, who is the senior vice president for 
policy & advocacy for the Society of Corporate Secretaries and 
Governance Professionals.
    Ms. Stuckey.

STATEMENT OF DARLA C. STUCKEY, SENIOR VICE PRESIDENT, POLICY & 
   ADVOCACY, SOCIETY OF CORPORATE SECRETARIES AND GOVERNANCE 
                         PROFESSIONALS

    Ms. Stuckey. Thank you, Chairman Frank, and Ranking Member 
Bachus.
    I am here today on behalf of the Society of Corporate 
Secretaries & Governance Professionals. Our members include 
corporate secretaries, securities lawyers, compliance officers, 
and even some executive compensation plan administrators. They 
work in companies of every size and every State and in every 
industry. I would love to talk more about us, but if you would 
like to know more, please go to governanceprofessionals.org.
    You have asked for our views on the effects of the 
implementation of the compensation-related provisions of Dodd-
Frank, particularly as they affect risk taking and particularly 
in the financial services area. Without taking a position on 
the impact of the Act specific to financial services companies 
only, since all companies are covered by Dodd-Frank, we do 
believe that the governance changes under Dodd-Frank, along 
with the SEC rules implemented since the crisis of 2008, 
generally will help companies manage and oversee risk and 
further corporate accountability.
    Our members who are financial services companies simply 
request that the SEC, the Fed, and the FSA coordinate their 
compensation rulemaking and do so soon.
    You also asked for our views on what the Federal regulators 
should consider, so I now turn to three of the executive comp 
provisions, and I apologize if you have spoken about these in 
the first panel at length, but I will talk about say-on-pay, a 
little bit on pay ratio, and clawbacks, as well as I would like 
to talk--
    The Chairman. No apology. We want your opinion. The fact 
that the other people talked about it makes your opinion even 
more important. So, please, go ahead.
    Ms. Stuckey. Okay. Thank you. I also would like your 
indulgence to talk a minute or two about the whistleblower 
provision in Dodd-Frank, which is not specifically executive 
comp related, but is very important.
    First, say-on-pay and say-when-on-pay. You know what say-
on-pay is, the shareholder vote on executive comp. It is 
effective for meetings after January 21, 2011. Our only concern 
with this is that the SEC's schedule as submitted may be too 
late. We urge the SEC to propose these rules soon in October, 
so the rules will be out in early January so we can hit the 
January 2011 target. Given the short timeframe that we have, we 
suggest they implement rules similar to the TARP companies. 
They have had it for the last 2 years. Our members would use 
that as a model and get that done.
    The Act also requires companies to give shareholders a vote 
on how frequently--this is what we call--how frequently they 
should get say-on-pay, we call say-when-on-pay. I guess the SEC 
calls it say-on-pay frequency.
    With respect to say-when-on-pay, SEC rulemaking should 
provide boards a choice this year whether to offer a resolution 
with their own single recommendation, for example, 2 years; or 
to give a multiple choice resolution where the shareholders 
could pick: A, B or C; 1, 2 or 3 years. We believe that this 
has to be driven by boards and managements. They are in the 
best position to recommend the frequency to ensure that the 
timing of the vote is aligned with respect to compensation 
programs, many of which are driven in 3-year increments. The 
shareholders will be able to express their views.
    Finally, on this one, the SEC should clarify that a 
shareholder proposal seeking an alternative 1-, 2-, or 3-year 
scheme would be excluded from a proxy statement. This would 
avoid unnecessary uncertainty or a conflict with the company's 
resolution, and we don't think it was your intent to have say-
when-on-pay votes every year in the 6-year period.
    Pay-ratio disclosure, I heard some of the colloquy. As you 
know, it does, by construction, apply to all employees. We 
would hope that all employees becomes all U.S. employees for 
U.S. companies and all U.S. full-time employees. We realize 
this rule won't be implemented until next summer or looked at 
until next summer, but we think that we need technical 
clarifications during this time, and we believe that the 
clarifications should be driven by intent and practical 
reality, which you have already heard. We don't believe that it 
was Congress' intent to include workers all over the globe to 
compare to U.S. CEO's, and in addition, it is quite, quite 
burdensome.
    One other thing that would help immensely with this and 
that we believe the statute should be clarified to provide is 
that total comp means total direct comp. That is cash: that is 
base salary, cash bonuses, equity comp, but not pension 
accruals, 401(k) matches, and other noncash items.
    Clawbacks: The Act also requires companies to implement 
policies to recapture incentive comp that would not otherwise 
have been received in the event of a restatement. This clawback 
provision is mandatory, provides no board discretion, covers 
all present and former executive officers, does not require 
misconduct, and has a 3-year look back; it goes well beyond 
existing law and practice today. Our biggest concern with this 
is that boards must have some discretion in this area to 
implement a clawback. At the least, it must be allowed to 
determine if recoupment would cost more than the expected 
recovery amount is worth; that is, whether you have to pursue 
litigation to get it back, the likelihood of recovery, whether 
it violates any employment contract, and there are also some 
State law concerns, that it would violate State law provisions.
    Surely Congress didn't intend to require clawbacks even 
where the recovery is less than the cost to recover it. For 
this reason alone, it is very simple: Boards must be given some 
discretion. So we urge the SEC to do that in its rulemaking, 
and at this point, I would recommend to you there is a letter 
from the Center on Executive Compensation attached to my 
testimony.
    The Chairman. Letter from whom?
    Ms. Stuckey. The Center on Executive Compensation. It is 
attached to my written testimony.
    The Chairman. Center for?
    Ms. Stuckey. Executive Compensation.
    Finally, I will turn now to the whistleblower bounty 
provision, and I appreciate your indulgence.
    It is in every company's best interest to have a robust 
compliance program, but the SEC and the U.S. Sentencing 
Commission strongly support effective in-house compliance 
programs that can prevent and detect criminal conduct or other 
wrongdoing.
    Section 922 of Dodd-Frank states that the SEC shall pay an 
award to whistleblowers in cash between 10 and 30 percent of 
any money they receive over $1 million that either they 
collect, the U.S. Attorney collects, any other SRO or any State 
Attorney General, as a result of the whistleblower's 
assistance. Importantly, the bounty depends on whether the 
informant provides original information to the SEC. That is, if 
an employee is aware of a potential violation and wants to 
report an issue, he now has to choose whether to raise it to 
the company or with the SEC.
    Employees have long been trained to raise issues first with 
their superior, alternatively with an ombuds or an ethics 
hotline or even to the chair of the company's audit committee.
    Under the new whistleblower provisions, an employee will 
now have a significant financial incentive to bypass raising 
the issue with the company at all for fear of losing the 
bounty, because if he raises to the company first, the company 
might beat him or her to the SEC.
    And if you believe the New York Post, the threat is real. 
Yesterday, the Post reported that when the new movie, ``Wall 
Street: Money Never Sleeps'' opens Friday, today, moviegoers 
will see an advertisement prior to the movie recruiting 
whistleblowers who know of misconduct at their companies. The 
ad will inform people of the potential riches that can come 
with being a whistleblower, letting them know that they can 
make money and also do a good thing. The ads also tell people 
that they can remain anonymous, and it also provides them with 
the address of the new whistleblower Web site, SECsnitch.com.
    We don't believe this was the intended result of this 
provision, having employees bypass their companies. It is 
contrary to long-established public policy, and it also 
undercuts the well-established internal compliance programs put 
in place after SOX that companies have spent so much money on.
    We suggest that the statute grant bounties but not on the 
condition that the whistleblower bypasses the company.
    Finally, we believe the SEC should refer to the defense and 
health care industries, which have long had to deal with false 
claims cases and have experience in this area.
    I encourage you to review my written testimony, and I think 
my time is up. I thank you.
    [The prepared statement of Ms. Stuckey can be found on page 
86 of the appendix.]
    The Chairman. I thank both of the witnesses for their 
testimony.
    Let me say to Ms. Stuckey, as I did when the gentleman from 
North Carolina raised it, the provisions about all 
compensation, the comparisons, did originate in the Senate. We 
have some questions about it. I guess it would seem clearly 
there would be a consensus that it shouldn't be every single 
employee. Now, I don't know whether it was drafted with enough 
flexibility to allow that, but if necessary, we would have to 
step in. I think that is clearly the case, and that was not one 
of the issues that we thought most important.
    So that would be our general sense would be to--we will be 
urging the SEC to narrow that, if possible, and if not, then we 
would do it statutorily if we have to, which clearly is 
necessary in that regard.
    Mr. Baily, you did note that with regard to how deep into 
the company we get, you had your own views they were not 
universally shared by the Squam Lake group. One question, is 
the Squam Lake group a one-time group? Are you guys going to 
hang out some more, or what can we expect from Squam Lake?
    Mr. Baily. We are going to hang out more. There is some new 
stuff that is going on to look at, the GSEs, Fannie Mae and 
Freddie Mac and a couple of other things. One or two members of 
the group have made a graceful exit, but we are still in 
business.
    The Chairman. With regard to the GSEs, I would advise you 
not to waste your time to advise us on the post-GSE regime. 
There will be no more GSE's. I think that is fairly clear. We 
will obviously be open to what would be replacing them, and 
that will be very important. The gentleman from Alabama.
    Mr. Bachus. Thank you, and Mr. Chairman, I want to 
associate myself with Ms. Stuckey's remarks about the SEC 
getting their rules on say-on-pay out as soon as they can 
because businesses need to make decisions, and it would be very 
helpful. It would give certainty, which is always, I think, a 
good thing.
    Let me go back to the question of Ms. Stuckey, for purposes 
of the median pay ratio disclosure, you said that it ought to 
apply only with U.S.-based full-time employees, and I tend to 
agree with you on that, but because this covers all--I am not 
sure anybody said this. This is not just financial companies; 
953 applies to all public companies, which in itself, we have 
talked about financial companies getting in trouble and the 
safety net. But would you go ahead and just explain for the 
record why you believe only U.S. employees.
    Ms. Stuckey. Sure, I would be happy to. I don't believe--it 
sort of caught our group by surprise and I understand that 
there is some appeal and there have been statistics quoted by 
the media in the past about average worker pay to CEO pay, and 
I am not sure how correct those are. So I can understand why 
someone would want to know what the average worker makes.
    We don't really think that institutional shareholders 
particularly care about this number, but companies are willing 
to implement Congress' intent, and it could be hugely 
burdensome. And without sounding like I am whining, if you are 
a multinational company and you have 100,00 employees in 20 or 
30 or 40 countries, there are lots of pitfalls. There are 
cross-border issues, like exchange rates. There are privacy 
laws in France, for example, that might not even allow you to 
do this, all kinds of things. So if you are willing to work to 
make this only U.S. employees, a lot of corporate secretaries 
and human resource professionals will breathe easier. So this 
is a situation where we don't think the cost would outweigh the 
benefit of what the number is.
    And the reason why we don't think that the pension number 
should be included is the pension number certainly is known for 
the CEO and the top five folks, but in order to find the median 
employee, it is very different than finding an average. You 
have to do an actuarial pension calculation for each of your 
8,000 people, say, in the pension plan, and that is for a 
medium-sized energy company in the Midwest that I spoke to.
    To do a pension calculation for 8,000 people and line them 
up in a row and pick the middle guy or gal, that is a huge 
burden. So we would urge you not to include that at all, but 
even if you wanted to include that, to allow the calculation to 
be done without that, find the middle person, then add the 
pension back in and then do the ratio, if you understand what I 
mean.
    Mr. Bachus. I do and let me say this. I agree with you that 
this would be a very burdensome problem.
    Mr. Baily, do you have any comment on it?
    Mr. Baily. I am quite concerned about the level of poverty 
in the United States. I am quite concerned about the fact that 
ordinary workers have not done very well in the last few years. 
I don't see how publishing that ratio helps anybody very much. 
So I am not a big fan of that.
    The Chairman. If the gentleman would yield, I would note 
again, that was a Senate provision, and I think our inclination 
is to see to what extent it can be lessened as a burden, and if 
not, we would be able to work to try and change that next year.
    Mr. Bachus. I think that is very helpful, and I think there 
is somewhat of a consensus building.
    Ms. Stuckey, what are some of the other potential hurdles 
or pitfalls to public companies complying with the Dodd-Frank 
compensation provision?
    Ms. Stuckey. I can mention one that I cut out in the 
interest of time, and that would be the pay versus performance 
disclosure. There is a new provision that the SEC provide rules 
on this, and I think companies are anxious about this because 
they want the rule to be written flexibly enough to explain, 
whether it be in draft form or not, how compensation actually 
paid is tied to performance.
    The current compensation structure of the current chart is 
not easy to understand. And they want to be able to tell--
boards and comp committees want to be able to tell their story, 
to explain which point in time relates to which compensation, 
and that some compensation may be granted in year one. It may 
be a reward for a past year's performance. It may be incentive 
for a future year's performance. Some compensation is based on 
just 3-year straight line performance pay based on net income.
    But they want to be able to show that at the bottom level, 
and you may not want to hear this, but at the bottom level, 
they want to be able to show that their executives are vested, 
just like the shareholders, and when the share price falls, 
they hurt, too. So their options become underwater, and the 
comp number that maybe the media reports isn't really what they 
got. So we want the SEC to write rules flexibly enough so that 
companies can tell that story.
    Mr. Bachus. Okay. Thank you.
    Mr. Baily, do you have any comment on that?
    Mr. Baily. No, I don't have any further comment on it.
    Mr. Bachus. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. I would note again that the provision just 
being discussed is another United States Senate provision. So 
we will be approaching with some--we will take a fresh look at 
it.
    The gentleman from Florida.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Baily, did I hear you correctly that before employing 
employees who should or could be subject to executive 
compensation requirements, that they should work with the FDIC, 
the SEC or whoever ahead of time before they make arrangements 
to employ these people, that they should work with them, they 
should go to a bureaucrat and get their plans approved or get 
some kind of warm and fuzzy from them?
    Mr. Baily. Maybe I misstated or maybe I am misunderstanding 
your question. I think there is a process going on now where 
the regulators that are approving the risk-management 
structures within companies so that they are meeting risk-
management standards are asking them to explain what their 
policy is on compensation.
    It is not that I want them to say, this is the amount going 
to each employee and we are going to approve that going to each 
employee. No, I don't think that is a good idea at all, but 
what is their policy and does it meet the requirements for risk 
management, both in terms of their own desire to reduce risk 
within their institution and to make sure that they are not 
putting taxpayers in risk should something happen to the 
company?
    Mr. Posey. Did I understand correctly--and I will look at 
the transcript--but you suggested they should go to the FDIC, 
the SEC or someone beforehand to make sure that their plans are 
going to be compliant in advance, like there is some latitude 
given to the bureaucrat to make this judgment call, and they 
would have some type of influence on the committee who is 
setting the compensation outside of clear and unambiguous rules 
that apply to everyone that should be easily understood by the 
sector of this country that provides jobs and produces and 
gives us a GDP that we enjoy, that regulates a lifestyle that 
we had, that we are going to have those people go to a 
bureaucrat and get an opinion or try and get some kind of feel 
good signal in advance before they cut a deal?
    I hope that is not what you said and that is not what the 
transcript will say because I find that appalling. I find that 
is probably the quickest way to destroy the economic system we 
are trying to get to recover, but that would probably do more 
damage than anything else when you have that kind of intrusion, 
unclear, very ambiguous, could be arbitrary, could be 
capricious, affecting private companies', public companies', 
opportunity to do business.
    I would think that you would say, here are the rules, if 
you don't go outside that box, you are okay. If you go outside 
that box, you are in trouble. Or maybe that you will establish, 
instead of a zillion different rules, say here's the new 
fiduciary standard, you have this fiduciary standard to your 
stockholders, and it would be a jury in question whether or not 
you break that fiduciary standard, and if you do break it, the 
consequences are severe.
    Thank you, Mr. Chairman.
    Mr. Baily. I certainly did not wish to create arbitrary and 
capricious rules or to create a system in which you have to 
have necessarily warm-and-fuzzy relationships with bureaucrats. 
So I, too, will look back at the transcript and make sure that 
I was saying something that I want to stand by.
    I do understand very much the need to have incentives and 
opportunities and that businesses be allowed to run their 
operations, as long as the policies they are following--and 
there should be clear rules about this, I agree with you again 
on that--so that within the rules, they are not imposing 
excessive risk on taxpayers.
    Mr. Posey. The biggest disincentive in the world is for you 
to have to clear your decisions with a government bureaucrat on 
any level. I just think the suggestion that you need some kind 
of government approval after you have made your decision, 
inside the box of the guidelines that are established, that 
should be clear, unambiguous is just staggering to the 
imagination.
    Mr. Baily. I take your point.
    The Chairman. The gentleman from North Carolina.
    Mr. McHenry. Thank you, Mr. Chairman, and I certainly 
appreciate the testimony.
    And Mr. Baily, your discussion began with, I think, a key 
point, which is income distribution deals with a lot larger set 
of issues like skills, education, training, the ramifications 
of the Tax Code, really the provisional incentives the Tax Code 
puts in place, and I appreciate you mentioning that at the 
beginning, because I think the one key thing that we can do as 
a matter of governmental policy is make sure that there is a 
skill base out there so that we can have a very diverse, very 
active economy, and appreciate you starting with that, and that 
is something that is of issue to me and my constituents at 
home.
    The question here today, the reason why we are even having 
this discussion is really at the heart, and I know the chairman 
has had this interest in executive comp for long before the 
financial meltdown. But the reason why we are talking about 
systemic risk and executive comp, well, compensation 
structures, is largely because of the Federal Government's 
actions to prevent a complete and utter meltdown of the 
financial marketplace. Is that basically your view, Mr. Baily?
    Mr. Baily. I am sorry, could you just repeat the last 
sentence?
    Mr. McHenry. Basically, the reason why systemic risk is the 
discussion is because the Federal Government had to bail out 
firms, right?
    Mr. Baily. Yes.
    Mr. McHenry. Then you look at the overall structure, and 
you said, of course, you got paid millions if you did ``X,'' if 
you failed, and you got paid billions if you succeeded, so of 
course, the incentive is to not worry about failure; somebody 
else will pay for it.
    My concern is this: We write a regulation, and to Ms. 
Stuckey's point, you have three or four different regulators, 
they write three or four similar regulations but just 
dissimilar enough, that you can't really please everyone, and 
then they stay on the books. And in the end, the marketplace 
figures out a way, with the force of money and the power of 
money and the power of ideas in order to make more money as 
individuals, and they get around it. So basically, it is great. 
Congress feels good. We have stuck it to these folks that were 
making all this money, and we feel good, and in the end, it 
nets out with nothing. Is that a concern that you have, Mr. 
Baily?
    Mr. Baily. Yes, it is a concern.
    Now, as we discussed a little bit in the earlier panel, one 
response to that is that many of these companies, and I think 
maybe that is a little also in answer to the earlier question, 
a lot of these companies are themselves reforming their own 
compensation structures, so they are not saying, oh, no, we 
don't want to do that. Some of them actually did it before the 
crisis. Some of the better companies and more enlightened 
companies had pretty good compensation structures, and they did 
withhold bonuses over several years, and in most cases, those 
companies fared better over this crisis than the ones that did 
not.
    So I don't think we are pushing this down the throats of 
most companies. We are trying to do things that, by and large, 
they are doing on their own.
    The only thing that we added I think in the Squam Lake 
Report was to make sure we don't just end up with systems that 
kind of align the employees with the shareholders, meanwhile 
forgetting that taxpayers could be on the hook. And so we want 
to make sure that at the level of incentive, particularly to 
the CEO, but to senior management, that they know that some of 
their pay is on the line if taxpayers have to get involved and 
so we can help avoid some of these bailouts that we had.
    Mr. McHenry. Would you agree that the best way for this to 
actually happen is not through a government regulation but 
through a corporation's reform within?
    Mr. Baily. I think there is an interest in--we do have 
supervision and regulation of our financial institutions. So I 
don't think we can just leave it to the companies themselves to 
do it. I think we have to make sure that it is being done in a 
way that protects us as taxpayers rather than just leaving it 
to--
    Mr. McHenry. Beyond financial firms.
    Mr. Baily. Oh, beyond financial firms?
    Mr. McHenry. I think that is an answer.
    Mr. Baily. I can certainly come back with a response, but 
if these are not companies that are going to get bailed out or 
receive government interest, by and large, they should do their 
own thing without the interference of the government.
    Mr. McHenry. Okay. And certainly it would be in the 
shareholders' interests to ensure, such as say-on-pay, can have 
their say-so and take their capital away from firms that don't 
have the right incentive structure where the CEO and the 
executives aren't truly aligned with the interests of 
shareholders, and the marketplace can make that choice. And 
that is what many of us are saying. It is not that we certainly 
support certain compensation amounts. It is that we believe in 
the individual ownership of that company rather than government 
regulation.
    And finally, Mr. Chairman, I appreciate your indulgence, 
but to Ms. Stuckey's point about total direct compensation 
versus an individual who has worked for a company for 30 or 40 
years and started at the retail, checking people out, has 
worked their way up and is number two in line to the CEO and, 
after 40 years, has a lot of deferred compensation, and it 
appears that he has a lot more direct compensation from the 
firm than he truly does. And I appreciate your interest, and I 
have folks in my district who have that very issue that it 
certainly overstates what they believe is really worthwhile to 
disclose.
    Ms. Stuckey. I would agree, and I just, if you have 1 
minute, I can give you a couple of other things, questions that 
have actually been raised by people attempting to gather the 
information: What do we do with 401(k) matches? What about mid-
year employees or part-timers? People who have come on with an 
acquisition? What about severance? What about people who are 
downsizing, given their huge severance package because they 
have been there 30 years and maybe you have accelerated their 
vesting, what do we do about that? What do you do about 
overtime and shift differential payments of hourly workers? And 
then, of course, there is the overseas currency, nonmonetary 
components, like apparently in overseas countries, many people 
get cars. Sometimes they even get food. There are a lot of 
things that might have to be valued. So that is the sort of 
nuts and bolts stuff that we are concerned about.
    Mr. McHenry. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. I thank the witnesses. This will be an 
ongoing process, and this has been useful, and we will continue 
to work on it. The hearing is adjourned.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]





                            A P P E N D I X



                           September 24, 2010




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