Tom Ramstack – AHN News Correspondent
Washington, D,C., United States (AHN) – Financial analysts told a special congressional panel Thursday that corporate executives should have their pay tied more closely to the investment risks of their companies.
Congress is investigating claims that excessive executive compensation contributed to the housing crisis and recession that started in December 2007.
They also are trying to determine how government can intervene to prevent the bad decisions of executives from dragging down the rest of the economy.
“Risk is not a factor in compensation,” Rose Marie Orens, a senior partner at Compensation Advisory Partners consulting firm in New York, told the congressional panel.
Currently, most executives are paid a percentage of a company’s earnings, which can reach into the tens of millions of dollars per year at some large corporations.
However, they do not risk losing their own money when they make decisions that hurt a company or its customers.
The pay system also encourages them to invest money in ways designed to earn a quick profit, according to witnesses before the Congressional Troubled Asset Relief Program Oversight Panel.
An example mentioned during the hearing involved Countrywide Financial Corp., a company that provides mortgages to homebuyers.
Its executives loosened credit terms to allow more people to qualify for home loans. When their personal finances failed, they were unable to pay back the mortgages.
As a result, many of them lost their homes through foreclosure, which contributed to the recession.
Investment firms Bear Stearns and Lehman Brothers were accused of making similar bad decisions to make credit easily available to customers.
The corporate executives made more money for themselves by extending the easy credit, but they also dragged down the nation’s economy.
“Has any executive of Bear Stearns lost their health care and had to go to an emergency room to get it,” asked Damon Silvers, a member of the congressional panel.
“Not to my knowledge,” said Kevin Murphy, finance chairman at the University of Southern California Business School.
The Bush administration appointed a “special master” to develop recommendations on how corporate executives are paid.
The recommendations from Kenneth Feinberg, the special master, include requiring corporate executives to accept a base pay that is consistent with salaries of other management employees.
Any incentive compensation they receive would be only in the form of corporate shares.
They would be forbidden by the Securities and Exchange Commission from selling the shares for a period of years.
A delay of years before they could sell stock would discourage them from trying to win quick profits for their companies that reflect bad business decisions, Feinberg said.
In addition, their retirement benefits – sometimes called “golden parachutes” – would be more limited.
Feinberg also recommended a bigger role for the Securities and Exchange Commission in monitoring executive pay, which now is determined almost exclusively by the corporations.
“I don’t think we approve anyone’s pay package – maybe one or two people – over $10 million,” Feinberg said Thursday before the congressional panel.
Sen. Ted Kaufman (D-Del.), a member of the panel, said he liked the idea of limiting incentives for executives to company stock rather than cash.
He implied it would make them invest more wisely.
“If the market goes down, they should take the hit,” Kaufman said.
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