RAY SUAREZ: As part of the ongoing effort by Congress to regulate financial institutions, the U.S. House took up the so-called “say-on-pay” bill that in some cases could let the government decide how much Wall Street executives are paid.
The measure would apply to the broader financial community, but is widely viewed as a response to the million-dollar bonuses paid to employees at banks that received bailout funds. Those firms already face restrictions on executive pay.
The House bill would give federal regulators the authority to ban incentive-based pay that could threaten the health of the company or the broader economy. The proposal would also give shareholders a nonbinding vote on compensation packages.
New Jersey Republican Scott Garrett said it was unwise to give regulators oversight of executive compensation, given their role in the financial crisis.
REP. SCOTT GARRETT, R-N. J.: The other side of the aisle seems to say that that was then and this is now. But the same regulators who missed Madoff, the same regulators who missed AIG, the same regulators who missed executive compensation and other problems in the past, now all of a sudden we are going to say to them, and even expand it even further, and say we are going to give those regulators even broader authority.
RAY SUAREZ: But Massachusetts Democrat Barney Frank, chair of the Financial Services Committee, said the bill would ensure that those who take risks with money are held to account.
REP. BARNEY FRANK, D-Mass.: All we are saying is that there has to be some balance to the risk-taking, that excessive risk-taking, that is — and people ask, what’s excessive risk? Excessive risk is when the people who take the risk pay no penalty when it goes wrong, when they have a “heads they win, tails they break even” situation.
RAY SUAREZ: The debate in Washington came a day after New York Attorney General Andrew Cuomo issued a report saying some of the nation’s biggest banks, many of which received billions in federal aid, paid out nearly 4,800 million-dollar-plus bonuses last year.
Citigroup, which is now one-third owned by the government, after receiving $45 billion in government aid, gave 738 employees bonuses of at least $1 million, despite losing nearly $19 billion last year.
Texas Republican Jeb Hensarling said the way to right the financial system was for the government to allow the free market to work.
Allowing the Free Market to Work
REP. JEB HENSARLING, R-Texas: The best way to deal with risky pay schemes is to quit bailing them out in the first place. My friends on the other side of the aisle are enshrining us as a bailout nation. And so you complain about the taxpayers picking up the tab. I've complained about the taxpayers picking up the tab. Quit bailing them out in the first place.
RAY SUAREZ: Georgia Democrat David Scott contended the bill would ensure that the free market is working for all Americans.
REP. DAVID SCOTT, D-Ga.: This is a free enterprise system, but it's not just free for top executives. It's free for shareholders. It's free for those men and women who've given their lives, their blood, their sweat, and their tears, and to see their companies in shambles because of excessive pay by executives who have abandoned those companies. What about their pensions? What about their retirement that have gone?
RAY SUAREZ: In the end, the bill passed 237-185, mostly along party lines. The Senate is expected to take up the legislation after it returns from its August recess.
We get some analysis now on efforts to curb compensation and the practices of Wall Street in the wake of the financial crisis. It comes from two people who closely follow this issue and have testified before Congress about it.
Lynn Turner is a former chief accountant for the Securities and Exchange Commission from 1998 to 2001. He's now a senior adviser for LECG, an economics and legal consulting group.
And J.W. Verret is an assistant law professor at George Mason Law School.
And, Professor, let's start with you. Let's talk a little bit more about mechanics. Under the bill passed today, how would these government appointees work to restrain executive compensation?
J.W. VERRET, George Mason University School of Law: Well, the bill has a couple of different provisions. The first provision would provide for say on pay, a so-called advisory vote on pay, where shareholders would sort of vote on the pay package that's approved by the board of directors and say whether or not they like it.
The second major aspect is a disclosure about compensation consultants that work for the board and that help to design compensation packages for the board of directors.
And the third major part would give the Federal Reserve and the other banking regulators much more authority to specifically prohibit certain types of pay packages and tell banks how they could compensate their employees.
RAY SUAREZ: So looking at a firm's books, they could say, "No, sorry, this pay deal is out of line"?
Who Would be Affected?
J.W. VERRET: They would absolutely have that authority for any institution over a billion dollars, so all large financial institutions, banks, investment banks, commercial banks, and Fannie Mae and Freddie Mac. They would have the authority to say specifically what sort of executive compensation is permitted.
Now, one of the concerns there is that there's been a growing movement to link bankers' pay to the bonds of those banks rather than to the stocks of those banks. But as we've seen, bondholders pretty much assume the government's going to bail the bank out, so when trouble comes, the price of the bonds really don't sink very low.
So I think one of the concerns we've seen expressed with that provision is that, if we link pay to bonds rather than link pay to stocks, you limit some of the upside for executives, because all the bondholders assume the government is going to bail them out anyway.
RAY SUAREZ: And, Lynn Turner, what do you think? Is this a good idea? Does it address some of the problems that many have seen over the last couple of years?
LYNN TURNER, former SEC chief accountant: I actually applaud Congress for moving forward on this one. There are some good parts to the bill. There were some parts of the bill that probably need to be improved.
But, certainly, giving the owners of a business the right to have a say on how the executives are compensated I think is an excellent idea and an initial step in the right direction.
I am concerned about the government getting involved with the government itself and setting pay, but let's be realistic.
We can't maintain the status quo. The one thing we know is what was happening in the past absolutely was a disaster with tremendous negative implications, and we shouldn't sit idly by and let that happen again. As they say, the first time you have that type of mistake, shame on you. The second time, shame on me.
RAY SUAREZ: Lynn Turner, what about getting shareholders involved in this? Do you think that that's a worthwhile idea and that, if people get the way they do now, proxy statements in the mail, that they'll actually go ahead and fill them out?
LYNN TURNER: I think making it more of a direct negotiation between shareholder groups, if you will, and the management who works for them I think is a good idea.
The compensation committee members of these boards certainly have a key, an important role, and they probably know the data better than shareholders do, but on the other hand, what we do know is the compensation committee at organizations such as AIG, such as Citigroup, Merrill Lynch have done an absolutely horrendous job.
And, you know, when they do a horrendous job like that, there needs to be some accountability. And I think this bill by, first, giving shareholders a say on the compensation arrangements, and then, second, improving the compensation committee membership are both very good steps.
RAY SUAREZ: Professor, I think for a lot of people out there it's one thing when we talk about the companies that the government ended up taking a position in, nonvoting, no seats on the board, but in this case, some oversight unto the pay packages.
But are we crossing a very different line when we say, these are government appointees who will look at the operations of private corporations and decide whether it's OK to pay the bosses a lot of money?
Potential of a Hasty Mistake
J.W. VERRET: Well, sure. Look, nobody is -- I think everybody will agree that executive compensation at the four or five really worst examples that were just mentioned, I think, were deplorable. Everybody I think would agree with that.
But to take those five examples and use it to regulate the 13,000 publicly traded companies in the United States might be a hasty mistake. And I think one of the things we should do is wait for the Financial Crisis Inquiry Commission to come up with some good recommendations on corporate governance.
One the other concerns that's been expressed with executive compensation regulation is that one of the most vocal proponents of this bill that just passed through the House have been union pension funds and government pension funds and other special interests.
And I think there's some concern that those special interests will use this new shareholder power toward their own interests that might not be the same as long-term wealth maximization.
So it's a question of whether you want the politics of special interests to take place within Main Street investor's 401(k)s, and I think that's an issue worth considering.
RAY SUAREZ: Lynn Turner, there have been efforts in the past to control what was called excessive compensation, as long ago as the Carter administration, more recently with new laws on disclosure. Have they worked? Or have there been unintended consequences?
LYNN TURNER: I think, in the past, we just haven't got it done right. And, again, I am very cautious and concerned about the government getting into setting compensation. But when you give the investors the right to say and wade into that, I think that's fine and a good move.
As far as the argument about, would investors become special interests, those investors who are labor or public pension funds? There's no indication -- there has never been a case where those funds have ever been able to get a majority vote in their favor and act as a real, true bloc of special interests and been successful in the corporate community, so I think that's kind of a "sky is falling"-type cry that just won't ever happen.
I do think this can work. And, again, it probably doesn't do as much as it needs to do, but it's certainly a step in the right direction Congress should take and should be commended for.
Boards Haven't Changed Behavior
RAY SUAREZ: Lynn Turner, in the time we have left, were you surprised at all by the results of the Cuomo report from New York that showed that, even after all the adverse publicity, a lot of boards hadn't changed their practices at all and were still giving very large pay packages even to money-losing companies?
LYNN TURNER: You know, I've been an executive in a large international company. I've sat on the boards of these public companies. I'm not surprised at all.
When you have such large sums of money that are involved, that people can earn, it really drives their behavior. And absent some outside, independent force coming in and taking a look at it, I doubt it will ever get corrected.
So I'm not surprised by Cuomo's study. It shows that they're paying even a higher percentage of their earnings today in the compensation of these executives than what they did before the financial crisis.
So not only has it not changed, it's actually perhaps even taken yet another turn for the worse, which is stunning. But that's people, and that's the why people behave. And when you have money and people together and people's own interest, the only way you can avoid the abuses, quite frankly, is through sound, well-reasoned regulation, which is what Congress is trying to do.
RAY SUAREZ: Professor, quick reaction on the Cuomo report?
J.W. VERRET: Well, I think it's too quick to make a distinction. I think sometimes parts of banks are healthy and parts aren't. You don't want to penalize the healthy parts to hurt the parts of the banks that have lost money. And we've got a lot more research on this at mercatus.org, where you can learn more about our research on the executive compensation question.
RAY SUAREZ: Professor Verret, Lynn Turner, thank you both.
LYNN TURNER: Thank you.
J.W. VERRET: Thank you.
JIM LEHRER: And speaking of dot-orgs, you can read Paul Solman's take on why CEOs make so much money at his "Business Desk" blog. And as always, it's at newshour.pbs.org.