[StBernard] Frank Announces Hearing on Compensation

[Westley Annis]

Frank Announces Hearing on Compensation 

 

Washington, DC - Today, Chairman Barney Frank (D-MA) announced that the
House Financial Services Committee will hold a hearing on Friday, January 22
at 10 a.m., to discuss the issue of compensation practices for both
financial and non-financial firms.  The hearing comes after the House of
Representatives successfully passed compensation measures as a part of H.R.
4173, the Wall Street Reform and Consumer Protection Act.  At a press
conference this morning, Chairman Frank outlined what he would like to
achieve in this hearing and expanded on the need to focus on executive and
Wall Street compensation issues.  The following is a transcript of Chairman
Frank's comments from this morning:

 

"Good morning. First, I want to talk about the question of compensation in
the financial industry, which you all know has become a continuing source of
interest. We will be having a hearing a week from Friday on the 22nd. Votes
are now scheduled for that day but whether there are votes or not we will
have the hearing. The schedule has gotten kind of crunched because we have
the Democratic conference tomorrow and Friday. Then we have Martin Luther
King Day next Monday, so there are no votes until Tuesday night. And then
the following week is the Republican conference on Thursday and Friday. The
days are constrained so we are going to have a Friday hearing. I did not
want to wait too long.

 

"The question of compensation for people in the financial industry is a
legitimate cause of concern in the country as a whole, and we are going to
address it. We have taken some steps and part of what I am hoping is that we
can focus some attention on this. The Senate, as you know, is now
considering the financial regulatory reform bill, which includes the
language we put in - both the say on pay and instructions to the regulators
to prevent risk-based compensation or risk-inducing compensation. There are
some issues that we need to raise. One is say on pay is limited to a fairly
small number of officials at the top. With regard to the financial industry,
I think it's time to look at whether there ought to be a broadening of the
say on pay. Very large percentages of the revenue of some of these companies
are going to compensation, and it does seem to me that the issue about
whether or not the shareholder should be able to comment on that overall
amount is relevant. 

 

"I also want to explore some of the arguments that we are now hearing
against our acting. Companies have said that they had no option but to pay
what seemed to be outsized forms of compensation for the social value that
we are getting, or they will lose people to other companies. Well, that's an
argument for us doing it by statute and regulation so there's uniformity. I
also want to pursue further this argument they've made that if we get tough
they will go to other countries. The head of JPMorgan Chase apparently about
a month ago very angrily going through the newspapers told the Chancellor of
the Exchequer in England that their investment in Canary Wharf was at risk
because England was getting too tough. So I want to focus on this whole
question. I think the argument that oh if you do this then we'll go
elsewhere is greatly overblown. By the time they're through they are going
to have to go to Mars to escape the determination to restrict.

 

"There is an argument that says if you limit compensation too much you lose
some of the best people. I don't know where people would go for comparable
salaries. There may be in some of these financial institutions people
capable of playing major league baseball. I'm not aware of any. But absent
that, I don't know where they would go to get comparable forms of
compensation. I guess perhaps they could star in major motion pictures. But
I don't know what else they could do.

 

"Secondly, and this I want to take head on, if you do these restrictions you
may get less of this activity. That's not a bad thing necessarily. Look, I
think it's time for us to look at this whole question and we are not talking
about restricting the amount of activity in general as a matter of fear. But
if the financial industry tells us that the byproduct of things we want to
do for good public policy reasons will restrict the amount of their
activity, I want to look at the social impact of that. I think frankly there
is an element in which the financial system - the function of which should
be to be the means to the end of producing goods and services - has, to an
unhealthy extent, gotten into activities that are ends in themselves. The
whole function of which is to simply make money for the people who
participate. People like Paul Volcker, George Soros and others have said
that some of what they have innovated and engaged in doesn't do anything but
make them richer and in fact puts the country somewhat at risk. 

 

"So I want to look at compensation a week from now in the broadest context.
International competition - whether or not you are going to have people
going to different industries; whether or not this is a restraint on some of
what they do, if that is a bad thing.  I continue to wonder what it is about
the character of the people in that industry that says that if they are
being paid large amounts of money they need to get extra bonuses. Although I
will say that with regard to the proposals, and this is one of things we
want to look at, if you focus on controlling compensation in a way that is
too specific then you are inviting them simply to change the form of
compensation. 

 

"Again, and I will differentiate two things. There is clearly an
overwhelming public justification for the regulators restraining incentive
or banning incentive structures that incentivize excessive risk. Now we've
gotten that, and I want to help put some public attention on that. But the
question of the amounts is also a relevant one. No one is talking about
capping what they do, but I do think that we need to look at, as I said,
maybe expanding say on pay.

 

"And then the final thing is taxation at two levels, not obviously under the
jurisdiction of this committee. One, I think this makes the case - you know
one of the things the Republicans did when they came to power was to reduce
the marginal tax rate on all these bonuses from 39 percent to 36 percent.
When we talk about the marginal tax rate people want to understand that all
these bonus recipients are among beneficiaries of that reduction of the
marginal tax rate. I think we should be increasing the marginal tax rate at
that level of income and that is significant.

 

"Secondly, we have the Administration's proposal - we haven't seen the
specifics - for some form of tax on the enterprises. And I think, by the
way, that's the way to look at it. If you begin to tax bonuses or this or
that then you get kind of moving the pieces on the checkerboard. But some
form of taxing the entities, including, for example, some kind of tax on
assets, I think you can make a very good case. I'd make the case that some
of these institutions have just gotten too big. One of the arguments against
tax on assets is it gives us an incentive not to be so big, well that's a
good thing not a bad thing. But here's the argument and here's where
compensation comes in - when the Administration talks about increasing the
levies, they say oh you can't do that because then we won't have enough
money to lend. Well why does that not apply to bonuses? Why does that not
apply to the very large amounts of their revenue that they pay out on
compensation? I mean if they are arguing that if you tax them they won't
have enough revenue to lend that would seem to me to apply to these massive
bonuses. And if you can in fact get some of this work done for less then
that's something that we ought to do. So that is the set of questions that
we are going to be looking at.

 

"I know we said that we would talk about the agenda. We haven't formalized
that, and I'm going to have a caucus with the Democrats on the committee and
we are going to talk about what other members have. There are some things
that obviously carry over. Corporate governance; housing finance which
includes the GSEs, the federal home loan banks, Fannie Mae, Freddie Mac.
What the interrelationship of those should be with Ginnie Mae and the FHA
that will be a subject that we will deal with. We have some affordable
housing things. The Secretary has a proposal to replace Hope VI with Choice
Neighborhoods and that one we need to legislate. The multi-development
banks, the World Bank and the regional banks, are all up for capital
increases so that is much of what the agenda will be. There will be some
other things as well. 

 

"But I did want to announce specifically today that we will have a hearing a
week from Friday on compensation. And obviously the basis, if we were
satisfied with the way it looked we wouldn't be doing it. I think
compensation has gotten excessive. We may not be able to deal with it; there
are limits to what you can do publicly. But I want to explore what we can do
further; I want to underline what we are already doing. Frankly, in the hope
that maybe the Senate will be even more inclined to do this. Remember we
passed the compensation reform earlier this year. They didn't act in the
Senate. I'm hoping that the Senate will. I know that Senator Dodd has been
in agreement with us on it.  And we want to consider the broader
implications. We want to talk about ways to deal with excessive compensation
that are legitimate for the government's role. We will also then deal with
the arguments against that. And the arguments against that is, well it's
going to be bad for society, bad for the economy if you do those. I think
it's time to have those arguments aired and that is what we will do."

 

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